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6 things everyone should know about mutual funds

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John A. Barnes John A. Barnes
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 Article prepared by Northwestern Mutual with the cooperation of John A. Barnes. To contact John A Barnes, call (304) 292-3339, email j.a.barnes@nm.com or visit jabarnes.nm.com.

Last year, an estimated 90 million individuals owned mutual funds — a number that has remained steady over the past decade despite recent market ups and downs, noted in the 2012 Investment Company Fact Book. What accounts for their enduring popularity?  The answer is simple: Mutual funds are uniquely designed to help investors accomplish a broad range of financial goals. 

To understand why, here are six things you should know about mutual funds.

 

  • They come in many varieties. There are thousands of mutual funds available in the marketplace, representing a range of asset classes, types and styles. Each has its own investment approach, which is explained in the prospectus. All you need to do is find the one that meets your particular goals, risk tolerance and objectives.
  • They're professionally managed. Most investors don't have the time, resources and expertise to manage a portfolio of investments on their own. When you invest in a mutual fund, you are hiring a full-time professional money manager to buy, sell and monitor your investments on your behalf. As economic conditions change, the portfolio manager has the ability to adjust the mix of fund investments to ensure it continues to meet the fund's objectives. This day-to-day oversight can be valuable, especially during times of market volatility. 
  • They provide broad diversification. Most mutual funds hold 50 or more securities in their portfolios — far more than the typical investor can afford to buy on their own. This level of diversification is important because it helps limit the impact a decline in the value of any one security may have on your portfolio's overall performance.
  • They're easy to track. Mutual funds make managing your investments easier by offering you a spectrum of investments in one fund portfolio. This means you don't need to track the performance of multiple individual securities; your fund provider does it for you. You'll receive quarterly and annual fund statements summarizing important performance, transaction and earnings information.
  • They offer an affordable way to invest. Investing in a mutual fund usually doesn't require a large sum of money, which makes it easy to get started. What's more, mutual funds offer a cost-effective way to invest. Because they buy and sell securities in such large quantities, mutual funds typically qualify for lower brokerage commissions than individual investors can get. Mutual fund investors can share in these savings, enhancing the profitability of the pool. (These transaction cost savings, however, should not be confused with annual operating expenses that every shareholder pays.) 
  • They offer easy access to your money. Mutual fund investments are liquid, which means you can access your cash on any business day by redeeming your shares at their net asset value, or NAV. Of course, the amount you receive may be more or less than you initially put in, depending on how well the portfolio has performed during the time you invested. Most mutual funds also allow free exchanges within the fund family, enabling you to adjust your portfolio, at no cost, as your needs and circumstances change. 

 

What should you look for when selecting or evaluating a fund? Start with the fund's performance, including its one-, three-, five- and 10-year results (if applicable). This can help you understand how a fund has weathered market ups and downs and how it has performed over longer periods of time. 

As with any investment, a fund's past performance doesn't guarantee future results.  That's why you'll also want to consider other factors that can impact a fund's success, including:

 

  • The fund's sales charges, fees and expenses. These can add up over time and eat into your returns. 
  • Its turnover rate. A fund that frequently buys and sells securities may generate higher trading and capital gains costs.
  • The volatility of the fund. Generally, the more a fund's performance bounces up and down from year to year, the greater the investment risk.
  • Its tax impact. Check to see when a fund makes distributions before buying into the fund. This can help you avoid receiving a capital gains distribution immediately upon investing and paying more than your fair share of taxes. 

 

Analyzing these and other factors, and reading the prospectus, can provide a more complete picture of a given fund and help you to make an informed decision about whether it's right for you. But you needn't go it alone. A qualified financial representative can help you select suitable investments based on your particular investment objectives, financial circumstances, risk tolerance and tax status.

More Info

A mutual fund is simply an investment vehicle that pools the money of investors with similar financial goals in order to invest in a diversified portfolio of securities, such as stocks and bonds. 

You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. Your Northwestern Mutual Investment Services Registered Representative can provide you with a prospectus that will contain the information noted above, and other important information that you should read carefully before you invest or send money.