Frequently Asked Questions about Mutual Funds
- Alan Lavine and Gail Liberman
What is a mutual fund?
A mutual fund is a type of registered investment that pools money from people like you, and invests in a selection of stocks, bonds or both. An investment professional or professionals run the fund with a goal of making its investors or shareholders a profit.
Why are mutual funds so popular?
Mutual funds have become one of the easiest and most profitable ways to invest. Most require a $1,000 to start. But it can be less if you open a retirement savings account. Depending upon their investments, mutual funds work similarly to other securities. You stand to profit if the values of the investments in your fund have increased. If there are stocks in your fund, you may earn your share of periodic dividends, or profits passed along by companies to their stockholders. If there are bonds in your fund, you should get your share of periodic interest payments. Meanwhile, if one security in the mutual fund performs poorly, you won't necessarily lose your shirt.
How do you invest in mutual funds?
You can buy mutual funds through a broker, financialadviser or directly from a mutual fund company. The cheapest route typically is directly from the mutual fund company--either online or through a toll-free number. Brokers and some financial planners charge commissions or "loads" on the funds they sell. For a fee, you also can hire a financial adviser to buy and manage your mutual funds, along with other investments. Some brokers may offer certain mutual funds without commission, but expect to pay a bit more in annual expenses.
What are the risks of investing in mutual funds?
Unfortunately, as with any security, the value of your mutual fund may drop due to a number of factors.
So you need to know what your mutual fund is invested in and choose those investments wisely.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Rags to Retirement (Alpha Books)." You can e-mail them at MWliblav@aol.com.
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