- A mutual fund is a way for thousands of people to pool their money together to invest. Each investor buys shares in the mutual fund and gets a proportional amount of the profits and losses. All mutual funds are different. They invest in varying amounts of stocks, bonds and cash. Some also invest in things like real estate, annuities and precious metals.
- Some mutual funds have managers who choose the investments for the fund. There are also index funds that mimic a specific sector of the market. All mutual funds have a philosophy. Some are aggressive while others are conservative. Some are all stocks while others are balanced with stocks, bonds and cash. Some focus on small cap stocks or tech stocks or gold. The combinations are endless.
- Some mutual funds own hundreds of individual stocks and bonds. Each one performs independently. The fund managers add them all together to come up with a share price for the mutual fund. When they perform well overall the mutual fund share price goes up. When they perform poorly overall the mutual fund share price drops.
- Some of the investments owned by your mutual fund pay dividends. That is a set amount of cash per share periodically given to shareholders. All the dividends within the mutual fund are added up and periodically given to mutual fund shareholders. These can either be reinvested in the mutual fund or issued as cash.
- Some mutual funds charge a load. That's a fee to buy or sell shares of the mutual fund. There are many no load funds that charge no fees to buy or sell. However, even no load funds charge maintenance fees that are a percentage of your investment. This is usually a small percentage but it can add up as the years go by.
- Mutual funds are not guaranteed. They can grow by several hundred percent or dwindle down to nothing. The more aggressive the mutual fund the greater the potential for a big gain. However it will likely fluctuate wildly and could lose a great deal of its value. A conservative mutual fund probably won't grow as fast or far but will not fluctuate as much. Different styles of mutual funds appeal to different kinds of investors.
- When you invest in a mutual fund, you buy a number of shares based on the share price that day. Periodically you make money when you are paid dividends. Periodically you lose money when you pay maintenance fees. While you hold your mutual fund shares, the share price goes up and down. You don't actually make or lose money on your shares until you sell them. You are paid the price per share on the day you sell.
