Investing in Mutual Funds: Basic Facts
Whether you are investing in mutual funds directly or as part of your
401(k) (or similar) plan, you should know some basic facts about mutual funds.
- Mutual funds are not guaranteed or insured by the FDIC, any bank or government agency. There is no guarantee even
if you buy a mutual fund through a bank and the fund carries the bank’s name. You can lose money with any mutual fund.
- All mutual funds have investment risks. Some types of mutual funds have more risk than others.
- A higher rate of return generally has a higher risk of loss, just like any investment.
- Do not base future performance on past performance. Doing so would be like driving by looking in the rear view mirror.
- Beware of claims of spectacular performance. (See comparing mutual funds for
more about performance numbers)
- Every mutual fund has fees and expenses. These are costs which lower your investment returns. See comparing
mutual funds for more about comparing fees and expenses.)
- You can buy some mutual funds directly from the company running the fund. You can also buy many funds through brokers, banks,
financial planners, or insurance agents. These financial professionals generally charge you an extra sales fee for the benefit of
their advice. You can also buy many funds through a brokerage account or employer’s 401(k) plan.
Some funds do not charge an extra sales fee.
- Compare a mutual fund with others of the same type before you buy.
- Focus on the risk associated with a fund and do not chase after the biggest returns.
- Banks sell mutual funds, some of which carry the bank’s name. Be aware that mutual funds sold in banks are not bank deposits
and are not insured against loss. This can be especially confusing with a bank’s money market funds, one
basic type of mutual fund.
Next: Mutual Fund Investing: Pros & Cons
