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Tips for investing in mutual funds

interview26236689.jpgMutual funds are one of the most popular investing vehicles available today.However it is important to understand what a mutual fund is and how to best use one for investment.Here are some tips for investing in mutual funds-

  • Know the types of mutual funds-All mutual funds are not alike.Most mutual funds can generally be placed into one of three primary categories: stock, bond or money market. Many investors will diversify their portfolio by including a mix of the three different types.
1. Stock Funds-This type of fund is also called an equity funds.It is important to understand that these are the most volatile of the three, with their value sometimes rising and falling sharply over a short period. But historically stock funds have performed better over the long term than other types of investments. This is because stocks are traded on the expectation that a company's future results will include expanded market share, greater revenues and higher profits.It should also be noted that not all stock funds are the same. Bond Funds-This type of fund is also known as fixed income.They invest in corporate and government debt with the purpose of providing income through dividend payments. Bond funds are often included in a portfolio to boost an investor's total return, by providing steady income when stock funds lose value. Just like any other kind of mutual fund bond funds can be categorized. Bond funds range in risk from low to very risky. Though they are considered safer then stock funds these mutual funds have their own types of risk. Money Market Funds-This type of fund has relatively low risks, compared to other mutual funds and most other investments. By law, Money Market funds are limited to investing only in specific high-quality, short-term investments issued by the U.S. government, U.S. corporations, and state and local governments. It is important to realize that historically the returns for money market funds have been lower than for either bond or stock funds which can leave them vulnerable to rising inflation.
  • Before investing you must know the fund objective and the degree of risk that you will have with your investing. You should take the time to do the research you need before choosing a mutual fund to invest in.One of the best ways to do this is by reading the fund's prospectus.This is one of the most important documents to read when purchasing a mutual fund. This will supply the material information you will need to make an informed investment decision. Additional information that is also available in the prospectus on certain administrative aspects of the fund will include such items as: buying, redeeming and exchanging shares. Another document that should be read is known as the Statement of Additional Information (SAI).This document has information which supplements what is disclosed in the prospectus. A fund's audited financial statement and a list of its portfolio holdings should also be included in the SAI, as well as in the annual report. It is important to note that because the SAI has been legally incorporated into the prospectus, it will be assumed that you have read it. Financial experts agree that you should always ask for a copy and read the SAI before investing in a mutual fund.The final piece of documentation that should be read is the annual report. The annual report is the document that is forwarded to a fund's shareholders at the end of each fiscal year. It includes the fund's audited financial statements and a list of the fund's portfolio securities. Unless it is otherwise included in the prospectus, a fund will always include in its annual report a line graph comparing its performance to that of an appropriate broad-based securities market index, as well as a discussion of those events, strategies and techniques which affected its performance during the past fiscal year. You should keep in mind that an annual report includes material information which may not be available in other disclosure documents and, if available, should be read by a potential investor.

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