Mutual Funds
A mutual fund is an investment vehicle that uses investor funds to invest them in a variety of securities according to the fund’s objective. Generally speaking, a mutual fund manages a portfolio of cash, stocks, bonds, or some combination thereof. By investing in a mutual fund, an investor has the benefit of gaining exposure to all the investments in the underlying portfolio. Mutual funds take the work out of building a diversified portfolio with its professional fund management. Every investor’s relative share in the fund’s performance is based on the amount of owned shares so that no one investor holds preferred status over another. Additionally, unlike stocks which can only be purchased as a full share, mutual funds can be purchased in either full or fractional units.
One of the benefits of investing in a mutual fund stems from the desire for professional portfolio management without having to do the research or trades yourself. Most mutual funds are structured as open-end funds, meaning an unlimited amount of shares can be purchased with all sales commissions paid as sales charges. Mutual funds typically offer three types of methods for collecting fees for the sale of shares: front-end loads, back-end loads, and 12b-1 fees. Shares are normally bought through the fund’s distributor or a broker who initiates the transaction on your behalf. Contrastingly, shares can be redeemed via either the fund’s distributor or through a broker. Open-end funds are priced to reflect its net asset value (NAV) (the total value of all securities owned divided by number of shares outstanding, minus expenses) which is calculated at the end of each trading day.
Meanwhile, closed-end funds have a set number of shares established with its initial public offering (IPO). The shares of closed-end funds trade on the open market and its price relies on the traditional supply and demand of the markets. As a result, open-end funds can trade at a discount or premium relative to its net asset value (NAV).
Mutual Fund Types
The main type of funds are equity or stock funds that either invest in stocks or bonds. Additionally, there is a large assortment of other funds to choose from that can be a hybrid of equity/stock and bond funds. These funds are typically packaged as either balanced funds, growth and income funds, or some other variation thereof. Mutual funds that engage in a long/short strategy or invest in commodities are often considered as “alternative strategies” funds.
Mutual funds can be actively managed or follow a passive management style. For an actively managed portfolio, assets are managed according to the overall portfolio objective and often seeking to outperform a particular benchmark. Investments are normally decided by one or more portfolio managers, supported by a team of researchers. Meanwhile, a passively managed mutual fund often seeks to imitate that of a particular index with little need for active management. Overall, there are a broad range of mutual funds to choose from, all with differing investment objectives, allowing an investor to pick and choose which mutual funds will enable them to have a well-diversified portfolio according to their risk tolerance and income needs.
What is the difference between a load versus no load fund?
A load is a term used to describe the sales commission of a mutual fund. If a fund charges a load, it will be an additional cost added onto the net asset value of the mutual fund shares.
How can I invest in a mutual fund?
All of our consultants at Florida Financial Advisors are knowledgeable on the many different types of mutual funds available and can help guide you to make sure one of them is the right choice for you. Contact us today for a free consultation.
Note: All investments involve potential risks, including loss of principal. Please consult with your professionals regarding your specific situation prior to making any investment decisions.
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