Portfolio

by

Published: May 11,1998

Most of us know we should invest a portion of our money to help meet future financial needs. But for those of us with little investment knowledge or time to monitor investments, a foray into the stock market can be intimidating or even worse — disastrous.

If you fall into this category, investing in mutual funds may be your best bet. Here are some common questions and answers about mutual funds from the Mississippi chapter of the International Association for Financial Planning (IAFP):

Q: What are mutual funds and how do they work?

A: Mutual funds are investment companies that combine your money with money from other individuals and then invest the funds in stocks, bonds and other securities. A portfolio manager and research team manage the funds by researching various investments, analyzing financial statements and deciding when to buy and sell.

Many mutual funds allow a low minimum investment. Your contributions to the fund are used to buy shares — the number of which is determined by the price per share when purchased. Throughout the year, each investor receives dividends and capital gains (also called distributions) generated by the fund.

Q: What are the advantages of investing in a mutual fund compared to individual stocks?

A: Mutual funds offer several advantages:

• Professionals manage the fund on a daily basis. You don’t have to continually research and monitor individual investments, deciding when to buy or sell; a portfolio manager and research team do that for you.

• Fund investments are diversified. A typical mutual fund is invested in as many as 100 or more securities. This diversification helps to spread the risk if one or more stock value drops.

• You have easy access to your money and a simple method of monitoring your fund’s progress.

Q: How will I know what fund to choose?

A: To help narrow your choices among the thousands of funds available, first look at the various types of funds. Mutual fund investment alternatives include international, aggressive, growth, municipal bonds, balanced, growth and income, Ginnie Mae, equity income funds and money market funds. Each of these types have varying degrees of risk, including the risk of loss of principle and risk of loss of purchasing power to inflation. Carefully consider which types of risk you are most comfortable with, considering your investment goals and your investment timeline.

Make sure you are aware of the costs of the fund. Load mutual funds are sold by financial advisers, brokerage firms, banks and insurance companies that make a commission. No-load funds don’t pay commissions to advisers. They sell their products through advertisements and other marketing techniques. Many advisers will help you select no-load funds for a separate fee.

Q: Are there other costs when you invest in a mutual fund?

A: All mutual funds (both load and no-load) charge varying operating fees, which are passed on to the investor as an annual charge. Other charges may include a redemption fee when you sell your fund. An investment company’s prospectus describes the fund and its performance history and discloses all charges.

Q: How much should I invest in a mutual fund?

A: Most mutual funds require at least $1,000 as an initial investment and a low minimum amount — usually at least $50 — for additional contributions. You should invest as much as your financial situation will allow. If you decide to purchase a high-risk mutual fund, the best way to invest is for the long-term. Use systematic investing — also known as dollar-cost averaging — to contribute the same amount to the fund each month. By doing this, you limit the number of shares when prices are higher and buy more shares when the price per share is lower.

Don’t forget, your distributions are taxable regardless of whether you receive cash or choose to reinvest the money. The exceptions: tax-deferred retirement accounts and tax-free municipal bond funds.

Q: What’s the best way to learn about mutual funds?

A: Once you’ve narrowed your choice to a few mutual funds, request from each investment company a prospectus and an annual report, which tells how the fund has performed and provides details on specific investments. There also are numerous trade publications and newsletters that cover the mutual fund industry.

J. Thomas Grantham Jr., CPA, CFP, PFS, ABV, is president of Grantham, Randall, Arrington & Co. in Jackson.


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