subject: Diversifying Your Investments With Mutual Funds [print this page] Diversifying your investment with mutual funds is an important consideration in your investment strategy. The process of spreading your investment portfolio over many different assets and asset classes is necessary to be successful in your making money strategy. By spreading your money over many different assets, you are able to synergize your portfolio and obtain a greater return from your investment by spreading your risk over many different stocks.
It is important to do proper research on the mutual funds. A mutual fund is a pooling of money with a fund manager. This fund manager chooses which stocks to invest in that fit the criteria of the mutual fund by-laws or mission statement. For instance, a mutual fund may have the mandate to invest in only gold or gold related stocks. The manager has no legal right to decide he wants to invest in oils since he thinks they are a better investment at the time. He is forced to stay within the by-laws of the fund.
Investors will purchase into the fund from either the fund itself or from other brokers. Some funds are closed funds and do not issue additional stock. If there is not a market for that fund, then a potential investor will not be able to purchase into that fund. Mutual funds also will have a minimum required investment. If an investor does not have that amount of money to invest, then they also will not be able to invest in that fund.
The price that is paid for the mutual fund for open funds is the net asset value (NAV) plus the commissions and fees. The NAV is calculated by taking the value of the assets of the fund minus the liabilities which is then divided by the number of outstanding shares. The NAV is recalculated at the end of each business day. A closed fund's price is determined by what the purchaser and seller determine to be a fair price.
There are some positive and negative aspects to mutual funds. A negative aspect is that the investor has no control over what their money is invested in. It is basically up to the fund manager as to which stocks he wishes to put the money into, subject to the by-laws. Another negative is that there are always fees associated with the fund. Even if the fund is losing money, the fees associated with the fund still need to be paid. Obtaining a true valuation of the mutual fund is also difficult. The value is not calculated until the end of the business day, so during the day you do not have a valid estimate of the funds value.
Some positive aspects of the mutual funds have already been partially discussed. The investor is able to pool their funds with other investors and purchase a larger quantity of stock than they would have been able to purchase on their own. Their risk is spread over many different stocks. The reduction of risk is perhaps the greatest advantage of mutual funds. Another advantage is that you have a supposed expert who is picking the stocks to invest in. They have access to information that the common investor does not have access to.
It is important to remember that all investments do carry an element of risk. It is important to read the prospectus very carefully before choosing to invest in a mutual fund. Read about the amount of fees they can charge. You want to find a fund which has a very low ratio of fees. You should also read about their by-laws for what they can invest in and what the process is for changing those rules.
Watch for those industries which are expected to grow in the next few years. Too many people choose funds based on prior years results. The prior year is no indication for the coming years as far as mutual funds go. You should instead evaluate an investment based on the expected growth of the industry.
