INVESTING IN MUTUAL FUNDS
- FOR BEGINNERS -

Investing in mutual funds can be a good way to diversify your money and a great way to get your kids investing in something other than the bank. Diversifying money, or placing it in several different investments, is a wise thing to do.

If your money is in just one place, and that one investment doesn't do well, all of your money doesn't do well. If, on the other hand, you spread your money out over several different types of investments, the road to creating wealth won't be as bumpy and you'll sleep better at night.

You may want to consider having part of your money in the bank, part in stocks, and some in mutual funds.

WHAT IS A MUTUAL FUND?

Investing in a mutual fund is like investing in a whole bunch of stocks all at the same time. It's like a collection or a portfolio of stocks.

If you don't have countless hours to do research or the know-how and desire to do the due diligence (or homework) that's necessary before you put money into the stock market, investing in mutual funds is the way to go.

When you own a stock, you are called a shareholder because you own a share of the stock. You can also call yourself a shareholder when you are investing in mutual funds, because you own a share of each unit in the fund.

Each mutual fund is owned by a financial company, and is handled by one or more managers. These managers are experts at investing and do this as a full-time job.

The manager has done all of the due diligence on the stocks in his fund, and keeps a close eye on them. He will buy more of a stock when he feels the time is right, and also sell when he feels it's time to sell. All this is handled for you.

This makes investing in mutual funds easy as all you have to do is decide which fund is best for you and let someone else do the investing.

Do you want a fund that consists of bank stocks and bonds, or a fund that consists of stocks in solar energy? Do you want a fund that has invested in the Japanese market? the Russian market? the oil market? the gold market? (confused yet?)

There are piles of different mutual funds to choose from, but don't panic. Your financial planner can help guide you as to what mutual funds you might want to look at.

He/she will also ask you if you would be more comfortable with a fund that is low risk, medium risk, or high risk. If you don't know what you want, let your planner suggest a few high performing funds and the managers that run them, and then you can decide for yourself.

It's important to know that if you are wanting to invest for the short term, mutual funds are not the way to go. There are fees involved when investing in mutual funds (see below), so it's best to look at them as a long-term investment.

You will probably hear your financial planner say that you shouldn't even think of taking your money out of mutual funds for at least three years. The longer you leave your money in there, the better.

Investing in mutual funds is ideal for children as they can leave their money untouched and just keep adding to it as the years go by. They have the power of time on their hands, so they can build their wealth from early on.

My kids have two mutual funds each that they have picked out and they add to these funds monthly. They get a statement once a month and also have access on the computer if they want to see how their funds are doing. Until they are 18 years old, their mutual funds have to be under my name in trust.

If you want to switch from one mutual fund to another, there is usually no fee attached if it's within the same financial company. These financial companies have several mutual funds to choose from, so switching is easy.

We usually meet with our financial planner on a yearly basis and decide if we want to switch to a different fund or stay with the ones we have. Either way, we don't take our money out, just switch our funds, if we feel we need to, while still staying with the
same mutual fund company.

Here are some mutual funds in the USA and some mutual funds in Canada for you to browse through.

When investing in mutual funds, it's important to be aware of the following fees:

NO LOAD MUTUAL FUNDS

With this type of mutual fund, there's no fee at all. It goes without saying that you should always try to invest in no load mutual funds.

But ask your financial advisor what the expense ratio is for these funds. (The expense ratio is the mutual fund's expenses - like all the fees the manager has to pay to buy and sell stock, his salary, his lawyer's fees, the expense of renting an office space, etc.) Some of these expense ratios can go between one and four percent per year!

Try and look for a no load fund with an expense ratio of one percent or less.

BACK LOAD MUTUAL FUNDS

With this type of mutual fund, you will only pay a fee when you decide to leave the fund, also known as a liquidation fee. You will pay a percentage of how much money you have in the fund when you want to sell it.

So, say you initially invested $500.00 and you made 20% on your money. You now have $600.00 You will have to pay four percent on the $600.00 which is $24.00.

With back loads, the longer you own the fund, the less of a percentage you have to pay as the years go by. If you own it long enough, the load, or fee, will disappear altogether. Make sure you ask your financial planner the specifics if you decide to go with a back load mutual fund.

FRONT LOAD MUTUAL FUNDS

With this type of mutual fund, you will pay a fee right away when you buy into the fund, sometimes up to seven or eight percent.

For example, if you invest $500.00 and your front load fee is four percent, then you've really only invested $480.00 as $20.00 has gone to pay for the fee.

You have immediately taken a loss of four percent, so you would have to make four percent in the first year just to break even.