I’m back!! I took a short hiatus due to traveling among other things, but I’m back to provide you with the basic investing information you need to build a prospering financial future!
Today it was announced that Amazon bought Whole Foods for $13.7 billion!! For those who already had Whole Foods stock, congrats because your investment has increased by 28% today! Amazon stock has also increased by 3.04% today and is valued at almost $1,000 PER SHARE! Google is another highly valued investment. You may be thinking (as I would be), “Wow. I can’t afford to buy a share of Amazon or Google.” WRONG! You can have shares in both Amazon and Google along with other highly valued stocks. How? MUTUAL FUNDS!
Mutual Funds, a type of pooled fund, are collections of different securities in a portfolio. If you buy a share of a mutual fund, you are buying a part of the whole portfolio. Mutual Funds come with management and administrative fees that you will have to pay.
Most mutual funds are considered open-ended, meaning there are no restrictions on the amount of shares the fund can issue to an investor. A closed-end fund raises a fixed amount of capital during it’s initial public offering (IPO) then trades a certain amount of shares on the open market. Other types of pooled funds include:
The price or value of a share for a mutual fund is considered it’s Net Asset Value (NAV). A portfolio’s NAV can be found with a simple calculation: divide the total portfolio value by the number of shares outstanding. Not good with calculations? Not to worry, most investing information sites like MorningStar.com will list the NAV for you.
Another aspect to consider when investing in mutual funds is taxation. Investors pay taxes on income and capital gains of their investments. Funds distribute all dividends and gains by end of year and the share price normally drops with the distribution (This is known as the Dividend Irrelevancy Theory, which will be covered in a later article.). Many investors reinvest their distributions instead of taking the liquid cash. Remember, you do not pay taxes on money that is actively invested, you only pay taxes on the dividends and distributions you receive (liquid cash).
The advantages of investing in a mutual fund include:
- Instant Diversification – As stated in the previous #FinanceFriday article, diversification risk can be decreased by investing in 20 different companies, preferably in different industries. Many funds have a round lot, which is 100 or more stocks, bunds, etc. GREAT diversification.
- Professional Management – You will have professionals managing the portfolio. This where the management fees come from.
- Custodial and other convenience services
- Great option for small investors (like myself)
- Great for 401(k)s – Many of your 401(k)s are made up of multiple mutual funds.
Sounds like a great investment option right?! I agree! As a risk adverse investor who wants to be able to invest in a wide variety of companies and industries, I love the diversification mutual funds offer. It gives me, a small investor, a chance at investing in companies whose price per share is way out of my budget. Be sure to come back next week (I promise! lol) for more information on how mutual funds can be classified, different type of investment styles mutual funds offer, and more!
Hit me up via email, NsideMyBox@gmail.com, Twitter , or the comments below if you have any questions or comments. Happy investing!!