SIG - Mutual Funds Lesson

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What You'll Learn

When investing, it is important to have a wide range of assets and to select them wisely; one commonly-purchased asset is the mutual fund. This lesson will discuss various types of mutual funds and the costs and benefits associated with each. In addition, you'll see how the ability to calculate costs and potential returns can assist you in making smart investment decisions.

What is a Mutual Fund?

According to researchers, to achieve a high degree of diversification and minimize risk, you should have at least 15 different stocks in your portfolio. These stocks should be from a variety of different sized companies and industries. Since most of us are not experts on a wide range of industries and companies and do not have time to stay up-to-date on the strength and management of these companies, we often rely on subject matter experts to help us gather and understand this information.

pie graph depicting 12% to Bond Mutual Fund 1, 18% to Bond Mutual Fund 2, 21% to Stock Mutual Fund 1, 35% to Stock Mutual Fund 2, and 14% to Stock Mutual Fund 3 While most of us rely on experts to an extent, many investors are not comfortable giving up complete control of their investment portfolios to someone else. That is why mutual funds are so popular. Thousands of different mutual funds exist in the U.S. They can include stocks, bonds or both. Since individual investors can select the mutual funds they want to invest in and change the amount invested in these funds from time to time, they are able to maintain control over their investments.

The stocks and bonds in mutual funds are referred to as assets. When investors purchase mutual funds, they may choose to split their assets into different types of funds. They may choose to place 70% of the money into stock mutual funds and 30% into bond mutual funds. The 70% placed into stock mutual funds may be further split into specific stock funds: for example, 30% of the money might go into stock mutual fund 1, 50% might go into stock mutual fund 2, and 20% might go into stock mutual fund 3. The investor may then take the 30% of the money that is being used for bond mutual funds and divide it so that 40% goes into bond mutual fund 1 and 60% goes into bond mutual fund 2. This allows the investor to further diversify his or her investments. (See the Asset Allocation pie chart to the right.)

In the example presented, we would say that the investor's asset allocation, or asset mix, is 70% stocks and 30% bonds.

Stock Funds and Bond Funds

There are many different types of stock and bond mutual funds. Each of these is likely to be made up of many different stocks or bonds. The tables below describe the most common types of stock and bond funds.

StockMutual Fund Options Interactive

 

Investment Options Interactive

 

Since professionals manage these funds, there are various charges deducted each day from the market value of the assets in the mutual fund. These charges pay the cost of fund management activities such as selecting appropriate assets for the fund and adjusting the mix of assets each day. On an annual basis, total mutual fund charges generally range between 0.2% and 2% of the fund's market value. Bond mutual funds or stock index funds such as the S&P 500 typically have lower costs while the "value" and "growth" funds have higher costs.

Net Asset Values 

When you invest in a mutual fund, you do not directly own any of the individual shares of stocks or any of the individual bonds in the fund. Instead you own mutual fund shares.

The fund's net asset value is calculated at the end of each business day. To calculate net asset value, the market price of each individual asset (stock or bond) in the fund is determined. The fund's total market value is then calculated by adding the value of each individual asset in the fund. The daily amount of total expense charges are deducted from the total market value to give the net market value of the fund. The net market value is then divided by the total number of mutual fund shares owned by all investors in the fund.

Saving & Investing Goals Module Review

Now that you have completed this module, you should know and understand:

  • The difference between saving and investing
  • Choosing bonds as a safer investment
  • Taking risks with the stock market and earning large dividends
  • Benefits of the mutual fund

Saving & Investing Goals Self-Assessment

 

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