AboutWarren Boroson Expertise Author of "Keys to Investing in Mutual Funds" (Barrons), "Ultimate Mutual Fund Guide" (Probus), "How to Pick Stocks Like Warren Buffett" (JKLasser), and "The Reverse Mortgage Advantage" (McGraw-Hill). Former financial columnist for Gannett News Service.
Experience Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD) about mutual funds and a newsletter, FundDigest.
Expert: Warren Boroson Date: 11/16/2006 Subject: what are mutaul funds
Question i need to now what mutual funds are and there benefits
Answer Dear Maxine--
A mutual fund is a company that buys securities -- stocks or bonds or both.
When you become a shareholder of the mutual fund, you own a share of all its stocks or bonds.
The fund takes your money and invests it in all the securities its other shareholders own. So, if the fund has 200 different stocks, you become part owner of those 200 stocks.
Typically, the minimum first investment is $2,500 or $3,000.
To invest in a mutual fund, you need its 800 number. Call the 800 directory: 800-555-1212, and ask for the 800 number of (say) the Vanguard Group in Malverne, Pa. Or Google or ASK the name of the fund family.
When you call, ask for a prospectus and an application -- either for a retirement account (like an IRA) or for a non-retirement account.
Suggestion: A sound choice for a first fund for a young person may be Vanguard STAR. For a very timid investor, T. Rowe Price Spectrum Income -- which has limited exposure to stocks.
There are open-end funds (the more common ones) and closed-end funds, which trade on stock exchanges and which are not suitable, I believe, for a beginning investor. Exchange traded funds are another variety of mutual funds.
Some open-end funds have sales charges (loads); you buy them through a broker, insurance agent, or financial planner. You're better off buying funds directly because you avoid a sales charge (these are "no-load" funds).
Benefits of mutual funds:
1. You become the owner of (typically) a large number of stocks. One of the biggest dangers is that an investor will own too few stocks, so -- if just one of them gets taken out and shot -- his or her portfolio may suffer grievously. If someone owns just six stocks (which I'm told is common), one loser can cost a lot of money. Most mutual funds own 100 or more stocks.
2. An investor usually gets to own different kinds of stocks -- stocks in different industries. Again, protection against losses. If you own a diversified portfolio of stocks, and your energy stocks (say) get hurt, your stocks in other industries (airlines, say) may keep your portfolio stable. (You want a stable portfolio, among other reasons, in case you suddenly need cash and have to sell something.)
3. You usually get to own good securities -- defined as those whose price will go up and stay up. The manager of a fund will try to buy stocks that are very cheap (value stocks) or very good stocks that aren't expensive (growth stocks).
Index funds buy all or a sampling of the ssecurities in a mirror of an investgment market, like the stock market.
And even if you buy shares of a stock index fund, the stocks will have been chosen originally because they were considered top-flight. And if they falter, they may be booted out. (As Abby Joseph Cohen once said, indexes are actually actively managed. The securities in them aren't arbitrarily chosen; they're chosen because they're considered good securities.)
A big extra advantage of index funds: They typically are very inexpensive.
4. These days, you can obtain a diversified portfolio of securities simply by buying a "target retirement" fund--which may give you exposure to all sorts of different stocks aand bonds. Everything you need--in just one fund.
5. You can reinvest your distributions (capital gains, interest) into more shares without paying a charge.
6. You can check the past performance of a fund before buying it, check whether its expenses are high or low, and find out lots of other important information by consulting a newsletter called Morningstar Mutual Funds. Morningstar not only rates funds (those three years old or older), from one star (yuck!) but to five stars; it will even tell you whether to buy a particular fund -- or if you already own it, whether to sell it or hold on. Most larger libraries have Morningstar Mutual Funds.
Maxine, you might also want to get a copy of a book I wrote several years ago, called "Keys to Investing in Mutual Funds." As I am wont to say, it is not only the best book ever written about mutual funds; it is also a notable contribition to Western literature...and to Western thought.
