Three Main Uses Capital Appreciation Provides Income Tax Deferred Savings

What is it?
How many of you want to invest (or already do), but don't want to be bothered with deciphering the numbers of a company and deciding whether the stock is a good buy or not? Or perhaps the risk and volatility of the stock market makes you nauseous.

If this describes your personality, you are a prime candidate for mutual funds. A mutual fund is simply a large group of people who lump their money together and give it to a management company to invest it for you. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own a part of the overall fund.

Objectives and Risks:
For the most part, investors should buy mutual funds as a long term investment. The nice thing about mutual funds is that the objectives change from fund to fund. Each mutual fund has a different strategy, it is your job to decide what your objective's are. Mutual fund strategies range from growth/aggressive, low risk, balanced, momentum, and many others.

Your risk tolerance will play a big role in what fund you purchase, it all comes down to the old risk/return tradeoff. For example, if your fund is for retirement, then perhaps a low risk money market fund is best for you. Many funds justify their under-performance as a factor of risk. For example a mutual fund might fall short of beating the S&P 500, but at the same time it offers a beta (risk) that is much less than the market. If you are willing to sacrifice some performance in return for a better sleep at night then these "low risk" funds are a good option.

How to Buy or Sell it:
There are thousands of different mutual funds out there, most of them can be purchased directly through the mutual fund company, a bank, brokerage, or a financial planner. The commissions on mutual funds can vary widely from company to company and what style the fund is. A "load" mutual fund charges you for the shares bought plus a sales fee. A "no load" fund sells its shares without a commission or sales charge, but management fees can be higher.

Strengths:

You get to own several companies no matter how much you decide to invest. In other words, you get instant diversification . You can easily make monthly contributions. A professional manager is the one managing the money. Theoretically, because of his/her experience and knowledge you should receive above average returns.

Weaknesses:

A large majority of mutual fund companies don't come close to beating market averages like the S&P 500 and the DJIA . (Notice we said "theoretically" you will receive above average returns. This will be discussed in detail in future pages.) Fund managers take a slice of the profits for their work. This slice varies but can be quite high. You pay management fees no matter if the fund actually makes you money or not.

Next: 14. Options (Stocks)