1. What are Mutual Funds?
2. Different types of Mutual Funds
3. How to choose Mutual Funds
4. How to buy and sell Mutual Funds
5. Tracking your Mutual Funds

What are Mutual Funds?

**Recommended Reading**
	All About Mutual Funds Everything you'll need to know about Mutual Funds including finding the best funds for your needs. Mutual Funds for Dummies is also a great book on this topic.

Mutual funds are one of the best investment ever created for individual investors. But before you can understand what a mutual fund is, it is important that you have a basic understanding of stocks and bonds (Check out our Stocks and  Bonds Section). A mutual fund is nothing more than a collection of stocks and/or bonds managed by an investment company. Mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities. Therefore, several hundred million to a billion dollars are invested along with your money by the company. Each investor owns shares, which represent a portion of the holdings of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest.  You also get the same level of professional management of your money without having to have millions of dollars.

The total return on mutual funds are based on three things:
1) Income - Income is earned from dividends on stocks and interest on bonds. To distribute the income it receives over the year, a fund pays nearly all of this income to fund owners in the form of a dividend. With mutual funds, you have a choice of either to receive a check for dividends and distributions or to reinvest the earnings and get more shares. Dividends are taxable whether or not you reinvest them as additional shares in the fund (unless they come from tax-free municipal bond fund or it's a retirement account)
2) Capital gains distributions - If the fund sells securities that have increased in price, the fund has a capital gain, which is usually paid to investors in the form of a distribution. Funds typically pay one annual capital gains distribution in December, but distributions can be paid multiple times per year. As with dividends, capital gains are taxable whether or not your reinvest them in additional shares in the fund.
3)Share price change -  You also make money with a mutual fund when the share price increases. This happens when fund holdings increase in price but are not sold by the fund manager (thus, not incurring capital gains), the fund's shares increase in price. You can then sell your mutual fund for a profit.

Advantages of Mutual Funds:
• Professional Management - Mutual funds are managed by a portfolio manager and research team who screen the universe of investments for those that best meet the stated objectives of the fund. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Some managers will guide the fund to a sterling performance for so long that the managers practically become a celebrity. Warren Buffett, who practically runs Berkshire Hathaway, returned to investors average annual return of around 30% for over 35 years (Berkshire Hathaway is a stock traded on NYSE, but since it owns quite a bit of private and publicly traded companies that it's sort of like a big mutual fund). Another good example is Peter Lynch, who retired from Fidelity Magellan fund in 1990 after 13 years of returning it's shareholders with over 29% annual gain. Other funds bear the names of founders who established their credentials as stock market gurus before starting their own mutual funds. John Templeton, and Mario Gabelli are good examples.

• Automatic Diversification - The most basic level of diversification is to buy multiple stocks and/or bonds rather than just one. Mutual funds are set up to buy many stocks and/or bonds. By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you. Large mutual funds often own over 100 stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money. Mutual fund investing enables you to achieve high level of diversification with the highest possible return at lowest possible risk.

• Liquidity with Low cost - With mutual fund you can convert your shares into cash at any time. Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay. You can avoid paying sales commissions (known as loads) by buying no-load mutual funds. The most efficiently managed stock mutual funds cost less than 1 percent per year in management fees (It costs even less usually around .20 to .50 of a percent to invest in index funds).

• Flexibility - Among the thousands of mutual funds, you can choose a risk level that is comfortable to you.  If you are investing for a long term such as retirement, you may want to invest more heavily in stock funds. If you are retired already and want income, you may want to invest conservatively by putting your money in bond funds. And with a money market fund, you are sure not to lose your invested money (known as principal). You may also mix and match different type of funds to meet your financial goals.

• Simplicity with minimal investment - You can buy and sell funds through a broker, a bank , by mail or online. Buying a mutual fund is easy! Just call the 800 number to get the forms and sent a check to that particular mutual fund company (such as vanguard) or you can open a brokerage account with a discount broker (such as Waterhouse Securities) and buy hundreds of mutual funds from different mutual fund companies. Almost any big bank also has its own line of mutual funds, and the minimum investment is small (especially for retirement accounts). Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.

• Automatic reinvestment of earnings and payment Plans - Dividends, interest and capital gains distributed by mutual funds can be automatically reinvested for you in more shares. Reinvesting earnings should be a crucial part of your investment goals for the long term. Also with mutual funds, you can receive regular income from your shares at fixed interval. If dividends and interest aren't enough to cover the payments, the fund will sell enough shares to cover them.

• Easy access to information - Prices for mutual funds are published in the newspaper everyday, just like the prices of the stocks and bonds. You can also see their results over periods ranging from a month to ten years in list of magazines that publish comparative fund performance information in every single issue. Money and Kiplinger's Personal finance Magazine publish a monthly list of top performers in various categories. Majority of the funds have a toll-free numbers you can call to requests information about the funds and mutual fund companies are required to sent you a prospectus (contains almost everything you want to know about the fund: fees, past performance, it's objective, etc.) before selling you any shares. Majority of mutual funds will be happy to hear from you, especially if you are a shareholder.

**Highly Recommended Reading**

Mutual Funds for Dummies This book is an excellent guide to the world of mutual funds. Eric Tyson does a service to beginning investors by steering them towards the modest goal of getting the same return as the market by investing in low-fee, low turnover mutual funds (preferably index funds). Tyson covers nearly everything in this book, from how to build a portfolio, to what returns you can reasonably expect, to where to buy the funds. He covers stock funds, bond funds, and money market funds, and shows how you can evaluate them.

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