Investing in Mutual Funds

February 23, 2009

With the current volatility of the stock market you may be wondering if you should invest in mutual funds. If you are currently contributing to a 401K through your employer and you’ve had an opportunity to select the type of investment, the quarterly updates you receive clearly explain how your investment has been holding up.

How does a mutual fund work? For example, let’s assume you are contributing a certain percentage of your paycheck to your retirement fund. The manager of the fund utilizes the contributions from all employees and invests in stocks and bonds. If the stock market is up, chances are you are receiving a good return on your investment. If not, the opposite is true.

Successfully investing in mutual funds is dependent upon the portfolio or types of stocks and bonds purchased. For example, if you take a look in your local newspaper in the stock market section and look for Mutual Funds, you may notice a company name followed by a number. The number is listed under NAV.

What is NAV? NAV means Net Asset Value. This is the price for which shares are bought and sold. So, if the NAV price is $8.00 and the portfolio has one million shares, then the stocks and bonds would be worth eight million dollars.

While there are many types of mutual funds, it takes a great deal of reading and research to understand what they are and how investing in them would create a successful portfolio. Some of the types of funds include value funds, growth funds, growth and income funds, equity income funds, and balanced funds.

More familiar funds in this category would consist of sector funds. These are shares in companies in a specific sector such as health, energy, or technology. Index funds are those shares purchased through Standard & Poor 500.

Investing in mutual funds is a good idea as long as the manager seeks to diversify the portfolio by purchasing shares in stocks, bonds, and securities. If you work for a company that offers a retirement plan, you can easily check the type of investments they are making on your behalf.

As far as investing in mutual funds on your own is concerned, the best advice would be to seek a financial advisor who can determine if this is a good time to invest, and who will explain the difference between the funds and which one would be financially worthwhile.

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