1. Define Your Investment Goals & Objectives
  2. Define Your Investment Strategy for Your Portfolio
  3. Building Your Own Portfolio to Match Your Goals
  4. Monitoring and Rebalancing Your Portfolio
  5. The Bottom Line
  6. 401(k)s
  7. Exchange Traded Funds (ETFs)
  8. IRAs and Roth IRAs
  9. Mutual Funds
  10. 529 Plans
  11. Stocks
  12. Life Insurance
  13. Bonds
  14. Annuities
  15. Health Savings Accounts (HSAs)

Mutual Fund Basics

  • What they are: Professionally managed pools of stocks, bonds and/or other instruments that are divided into shares and sold to investors.
  • Pros: Diversification; liquidity; simplicity; affordability (low initial purchases); professionally managed.
  • Cons: Fluctuating returns; over-diversification; taxes; potentially high costs; professional management doesn’t always equal good performance.
  • How to invest: Directly through mutual fund companies; full-service and discount brokerages; banks; insurance agents.
  • Tips: Like ETFs, mutual funds are also available as target-date funds. These funds automatically adjust allocations based on how long you have until you retire, starting out more aggressively and gradually becoming more conservative as your retirement approaches.

A mutual fund company pools money from different investors to invest in a portfolio of stocks, bonds and other securities. Professional money managers (or teams of managers) research, select and monitor the performance of the funds’ portfolios. Investors own shares of the fund, which represent a portion of the fund’s overall holdings.

A mutual fund’s price is its per share net asset value (NAV), plus any shareholder fees the fund imposes. Most funds calculate their NAV at least once daily, typically after the close of the major U.S. exchanges. Mutual fund shares are redeemable, so you can sell your shares back to the fund any business day.

There are three ways to make money from mutual funds:

  1. Dividend payments: If the fund earns income in the form of dividends and interest, it will pay shareholders close to all of the income it has earned, minus any disclosed expenses.
  2. Capital gains distributions: If a fund sells a security that has increased in price, it will distribute the capital gains (less any capital losses) to investors at the end of the year.
  3. Increased NAV: A higher NAV represents an increase in value for your mutual fund investment.

In general, you get to decide if you want to receive dividend payments and capital gains distributions, or if you want to reinvest the money to purchase additional shares.

As with most investments, the higher the potential returns, the higher your risk. There are several different types of funds, each with its own risk profile:

  • Money market funds: These are considered lower risk than other types of mutual funds. By law, they are limited to investing in certain high-quality, short-term investments issued by the U.S. government (such as Treasury bills), U.S. corporations, and state and municipal governments. Returns tend to be twice what you would expect to earn in a savings account, and a bit less than a certificate of deposit (CD). These funds attempt to maintain a NAV at a stable $1.00 per share, and the fund pays dividends that generally reflect short-term interest rates.
  • Bond funds: These funds are higher risk than money market funds, partly because they seek higher returns. There are many different types of bonds, and they vary greatly in terms of risk and reward. Bond funds are exposed to the same risks associated with bonds: credit/default risk, prepayment risk, and interest rate risk.
  • Equity funds: This largest category of mutual funds invests in stocks. Individual funds use different strategies: growth funds, for example, focus on stocks with the potential for large capital gains; income funds invest in stocks that pay regular dividends. Equity funds are exposed to the same market risk as individual stocks, and prices fluctuate in response to a variety of factors, including the overall strength of the economy.

Tips for Picking Mutual Funds

  • Consider your time horizon and risk tolerance, being mindful of your overall diversification.
  • Look for funds that match these objectives (e.g., if you are willing to assume a fair amount of risk and don’t need the money for a while, you might consider a long-term capital appreciation fund).
  • Compare options: Look for top performers within that group.
  • Pay attention to fees: Opt for no-load funds, which don’t charge a front- or back-end load fee, and funds with low expense ratios.

529 Plans
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