Hello and a very warm welcome to another of my financial sites, which I hope will explain everything you need to know about mutual funds - not simply how to identify the best mutual funds for your investment strategy, but also ( and to me, more importantly) that you understand the underlying risks, the potential rewards, and all the strange terms that you will come across in your search of products currently available in the market. What I have tried to provide is a complete guide, which explains all you need to know about investing in mutual funds using simple and clear language. Should you be kind enough to read the entire site then by the end I hope you will know more than your financial advisor or the salesman selling you the products! - that's my aim with this site.
As some of you may know, I am a full time trader and investor myself, and one of my many hobbyhorses (of which I have several) is that I try to stress to all clients and investors the importance of understanding the products you are buying. In simple terms if you don't understand the product, don't invest. It's as simple as that, no ifs, no buts, no maybes. I make no apologies for this statement as I have seen too many horror stories of clients losing significant amounts of money simply because they failed to understand the risks. I know it's hard work, but would you rather spend a few minutes reading and researching, or several years trying to recoup your losses? Mutual funds are no different to any other form of investing - they all have an inherent risk ( which may be lower than other forms of investment ) but nevertheless they have a risk. It's no good saying after the event that you didn't understand the risks involved, or complaining to the company that sold you the investment in the first place. They will simply refer you to their terms of sale and that well known phrase we all love " investments can go down as well as up"! So, in summary the best mutual funds for you, are the ones you fully understand. If you would like to learn more about the basics of trading and investing, please just follow the link above to another of my financial sites.
Now before we move on let me just state here that mutual funds and ETF's ( or Exchange Traded Funds ) are not the same thing - and don't let anyone tell you otherwise. I am developing another site which will explain these in detail and will provide a link here as soon as it is ready.
Imagine for a moment that you have decided to invest in the stock market for your retirement, but unfortunately you only have a small amount of capital to invest, say $500. You talk to several of your co-workers, who all have the same problem and you all agree that it would make sense if you all pooled your money together, which would then allow you invest in a broad range of stocks, reducing your exposure and risk accordingly. In order to keep everything straightforward, you decide to set the fund up in a company, which then issues shares to each of you. One of your co-workers is appointed as the fund manager and another as a broker to manage the purchase and sale of shares in the company fund. Your fund starts to perform well, and as a result more of your co-workers join the fund, with additional shares being issued by the fund manager. As the number of shareholders grows, some of the original members decide to cash in their shares and sell them back to the fund via the broker. In addition to having an intrinsic value based on the performance of the fund, the shares also generate income from dividends during the year.
This in very simple terms is how mutual funds work, and is part of the attraction for the small retail investor, as they provide an opportunity to invest in the financial markets, and yet to have the risk spread between many different types of companies and sectors of the market. Now before we move on to look at all the various aspects of mutual funds, and how to identify the best funds for you, let me just give you a brief history of mutual funds, to put everything into context.
Pooling money in order to invest, whether in the financial markets, or elsewhere, has been part of our trading heritage for centuries. The origins can be traced back to the mid 1800's and probably before, with many such trusts from the UK helping to finance the American economy after the Civil War. The first recognised mutual fund was created on March 21st 1924 and was called the Massachusetts Investors Trust, and despite the Wall Street crash of 1929, it still operates today. By the early 1940's the number of mutual funds had grown to 70, and by the 1970's this had increased to nearly 400. Today, there are over 8,500 funds with nearly 10 trillion US dollars under management. Part of the reason for this spectacular growth has been the popularity of using mutual funds for retirement planning with the introduction of the IRA ( Individual Retirement Account ) developed in 1981 which allowed employees to invest up to 2,000 a year. Since then many other retirement plans have been developed including 401k and 403b plans. All ideal for mutual funds.
So, how do we start our search for the best mutual funds on the market? As I said at the beginning, start by understanding the product, and then decide if it's the best for you.