Interested in mutual funds but feel you lack the knowledge necessary to get started? Don’t worry! You’re not alone! Researching which mutual funds to invest in can prove to be overwhelming if you don’t truly understand mutual funds and how they work. Let me share some of the basics with you.

The Security and Exchange Commission (SEC) defines a mutual fund as, “A company that brings together money from many people and invests it in stocks, bonds, and other assets.” In other words, people like you and me pool their money together in a fund and professionals invest this lump sum in the market for us. Now since we all own shares of this fund, when the net asset value (NAV) increases, so does the value of our shares. Conversely, when the NAV drops, the value of your shares goes down. This is why it’s important to do your homework (more on that later).

There are two types of mutual funds. Open-end funds (the most common) and closed-end funds…

• Open-end Fund: An unlimited number of shares. The fund will just create a new one for anyone who wants to purchase a share.

• Closed-end Fund: A limited number of shares. Once they’re gone, they’re gone!

You’ll also need to choose between front-end load, back-end load, and no-load funds…

• Front-end Load: This is a service fee that is required upfront when purchasing shares. You will usually see this with funds that are historically good performers.

• Back-end Load: This is a commission that is paid to the agent that purchased your shares for you. No different than a salesperson receives after selling you that shiny new car!

• No-load: These funds charge nothing upfront to purchase shares.

You have a few options when it comes to purchasing mutual funds. You can purchase them directly through the fund itself, through an individual retirement account (IRA), or through your company’s 401(K) plan. I suggest doing your homework first though. There are many free resources on the Internet to research funds and how they’re performing (I like to use Yahoo! Finance). Another often-overlooked resource is to view the fund’s prospectus. This is where the company breaks down the fund’s objectives, performance, and any fees associated with the fund. Here are some of the fees you might see…

• Management Fees: Management Fees are charged as a normal part of doing business.

• 12(b)-1 Fees: The 12(b)-1 fees cover the cost of advertising and distribution.

• Redemption Fees: Redemption fees are a penalty for selling your shares before the contracted date. It’s used to prevent a high turnover rate in the fund.

So whether you’re looking to diversify your investment portfolio, or just wanting to invest in something that doesn’t take much time or effort, a mutual fund is a great choice!

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