Guest Author - Rhonda Cliett

What is a mutual fund?
A mutual fund is operated by an investment company which purchases a combination of investments including stocks, bonds, commodities, money market securities, or options. When you purchase a mutual fund you are combining your money with the money of other investors to purchase a variety of investments. A mutual fund provides diversification for your portfolio. You will pay fees in order to purchase mutual funds so you should be certain that you fully understand all of the fees prior to making a decision.

There are two types of mutual funds: load funds and no-load funds. A load fund requires that you pay a percentage up front to the person who sold you the fund. A no-load fund does not require the up front commission.

How do you purchase a mutual fund?
Most no-load funds are purchased directly from the investment company. Simply call the company and request an application. You will then mail your completed application, along with a check, to the investment company.

You can also purchase funds through a financial planner, banker, broker, or insurance agent. Generally, funds purchased from someone other than the investment company are load funds.

The newest way to purchase mutual funds is through an online fund supermarket. A fund supermarket offers a variety of funds from a number of different investment groups. Services and costs vary so you will need to do your homework to make certain that the fund supermarket you select meets your objectives. Some of the most well known fund supermarkets are by: Schwab, Vanguard and Fidelity.

Are all funds created equal?
No, there are basically three different fund mixes.

1. Equity funds – which are composed of stocks.
2. Fixed income funds – which are composed of bonds.
3. Money market funds – which are composed of money market instruments.

Within these different mixes are three categories:

• Value – Composed of companies that have an undistinguished track record. They are purchased when the value of the stock is low and are held until the company makes a turnaround and the price of the stock rises. The risk in value funds is that the company never makes a turnaround (and thus the price of the stock never rises).
  
• Growth – Composed of the fastest growing companies on the market. The primary objective is long-term growth.
  
• Blend – Composed of a combination of value and growth funds.
  

Each of these categories are further broken down to differentiate between the size of the companies being invested: large, mid, and small. There are also other types of categories such as sector funds which invest only in a single industry sector.

Are mutual funds a good buy?
Historically, stocks outperform mutual funds which is the most common argument against mutual funds. Too often the fees involved in the purchase of mutual funds end up making the fund managers more money than the earnings of the funds make the investor. As with any other investment, do your homework before making a purchase decision.

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