Funds: A slice of the bigger whole

Posted on Feb 25th, 2014 | Investing

An investment fund allows you to pool money from numerous investors and spread it out over different securities (stocks, bonds, indexes, or other assets), providing diversification. For example, a fund may include stocks from 100 different companies. When you buy shares of a fund, you get a portion of all of these investments.

Why Invest in Funds?

Because funds invest in a range of companies and industries, they offer easy diversification (multiple investments across different securities, which help reduce risk). In addition, they’re managed by professionals, which means you have to do less of the day-to-day portfolio maintenance. However, this comes with a price; the cost of management takes a bite of your earnings, and you have to be willing to give up direct control over your investments. Funds often offer relatively low initial investments though, which makes it easy to get started.

Money Flow.
  1. Money starts with invests.
  2. Then goes to a fund company, where it is pooled together.
  3. The fund manager invests that money into securities.
  4. The money those securities make goes back into the pool.
  5. Investors receive their interest, incomes, and capital gains from the fund company.
Power to Choose
  • Mutual Funds. They are companies that pool money from investors and invest in stocks, bonds, and short-term debt. They trade only at the end of the day at the net asset value price.
  • Exchange-Traded Funds (ETFs). They are similar to mutual funds in that they invest a pool of investors’ shares in other securities, but differ¬ent in that they are traded at varied market prices throughout the day.
Know Your Performance

It’s important to know how a fund has performed in the past so you can try to predict how it will perform in the future. Here are some terms you should know to understand the track record of your fund.

Capital Gains are offered after the price of a security in a fund increases and is sold. At the end of the year, the fund distributes its capital gains (minus its losses) to investors.

Net Asset Value (NAV) is your fund’s price per share.

Volatility measures the consistency of your returns over time. The higher your volatility (or less consistent your security’s return), the greater your risk of losing money.

The Rate of Return is the investment’s gain or loss over a specified period of time. Knowing a fund’s historical rate of return gives you a hint at how it might perform in the future.

The Fee Structure is a fund’s list of charges for operation and management.