Mutual Funds FAQ

This Mutual funds FAQ consists of some of the most asked questions investors have about their mutual funds. It is important to have some understanding of what you are investing in before you start to invest, so read this carefully.

What Are Mutual Funds?

Mutual funds are companies where individuals can invest their money and have it professionally managed by the company.

How do Mutual Funds Work?

These funds take all the money that is invested into them and reinvest it into the securities they think are best in hopes of getting a good return for their investors. For this funds will often charge a small fee.

Why do People invest into Mutual Funds?

There are a few advantages of mutual funds. For one they are normally widely diversified among hundreds or thousands of stocks. This allows an investor to diversify their risk without having to buy so many different securities themselves.

Another advantage is that they are invested by professionals, so people who are not comfortable with making their own investment decisions will find it easier to just give it to professionals.

What are the Types of Mutual Funds?

There are 5 major types of funds.

1. Money Market Funds – These invest into secured debt such as T-Bills.
2. Fixed Income Funds – These invest into Bonds in hopes of gaining income
3. Equity Funds – These invest into the riskier investments such as stocks
4. Balanced Funds – These invest into both bonds and funds. The idea is to get the safety from the bonds and the big moves that you normally get from stocks.
5. Index Funds – These do not attempt to make buy and sell decisions but rather invest into market indexes such as the S&P and Dow Jones.

What is the Difference Between a Closed Ended Fund and a Open Ended Fund

Closed ended funds can be traded on the open market just like stocks. Open ended funds however usually have to be bought directly from the company.

What is the Signature Guarantee

The signature guarantee is a guarantee that a user’s signature is valid and the fund accepts any liability of forged signatures. Most funds will have this.

What are Dividend Distributions?

When a mutual fund makes money it is required to pay their investors. These payments can be made monthly, quarterly, or annually depending on the specific fund. You may also request that the money is reinvested into the fund rather then sent back to you.

What is the Difference Between Yields and Return?

A yield is the income that an investor makes off of their fund, return is the amount an investor makes through capital appreciation.

How Much Does it cost

One of the questions I would expect to find in a Mutual funds FAQ is how much does it cost. Basically funds normally charge their investors between 1-3% a year. There may also be other fees such as a fee for buying the fund.

Can I lose Money in Mutual Fund?

It is possible to lose money in a mutual fund, investing carries risks. However the odds of losing money over the long term are pretty low.

What are the taxes?

Any distribution that you receive is taxed. This is true even if you have the money reinvested into the fund so be prepared. In addition to that whenever you sell the fund you have to pay capital gains tax if you sold it for more then you bought it.

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