In this, the third of a four part series, I will talk about mutual funds, but before I do, I want to let everybody know that Im not a big fan of mutual funds for 2 very good reasons:

• You still have to pay sales charges, annual fees, and other expenses regardless of whether or not the mutual fund makes money. And sometimes you might also have to pay taxes on any capital gains you have received — even if the fund went on to perform poorly after they bought shares (if you have forgotten what capital gains are, go back to Welcome to Wall Street, Part 1).

• You dont run shit. A portfolio manager decides what companies to invest in using your money. That means if you have a moral issue with investing in alcohol, gambling, or tobacco companies then you cant tell the manager that you dont want to invest in companies like that. Even though there are funds that invest only in socially conscious companies, such as these 20.

Mutual funds are fine for certain things: College investing for your infant, retirement investing, that type of thing. But as far as vehicles for mid term wealth production, Im not in. But regardless of my bias, having a mutual fund might give you a warm and fuzzy, so go with whatever makes sense for you.

How Mutual Funds Work

A mutual fund is a company that pools money from you, me, and alot of other investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of all these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor’s proportionate ownership of the fund’s holdings and the income those holdings generate.

Types of Mutual Funds

There are 4 types of mutual funds: Aggressive Growth, Growth, Growth and Income, and Income. Heres how they break down.

Aggressive Growth- grows your assets by investing in riskier securities
Growth – Conservatively grows your assets by investing in older, more mature companies that are still growing at a steady rate
Growth and Income – Grows your assets and provides some income by investing in stocks that pay dividends and bonds
Income – Pays you money. These are funds that invest only in bonds, and are the least risky of all the investment strategies

Investing in Mutual Funds

The price that you pay for a mutual fund share is called the net asset value (NAV). You can invest in mutual funds by buying shares in a one time, lump sum investment, or you can have funds automatically taken from a debit account monthly. Your money grows as the value of the shares increase, and from profits that the mutual fund managers make from selling off stocks in the fund. You can put your growth into overdrive by reinvesting the dividends that you earn, so that youre not only making money off the initial amount you invested, but you are also making money off the money that your initial investment made for you!

Making Money with Mutual Funds

There are 3 ways to make money with mutual funds: NAV Appreciation, Capital Gains distribution, and Dividends.

• NAV Appreciation – If the market value of a fund’s portfolio increases after deduction of expenses and liabilities, then the NAV of the fund increases.

• Capital Gains Distribution – Capital gains are distributed to investors usually at the end of the year. When a stock that your mutual fund owns goes up and the fund then sells that stock for a profit, you get that extra money. Thats what capital gains distribution means.

• Dividends – When the stocks that the mutual fund owns pays a dividend, they distribute that to the fund investors.

Just like with stocks, mutual funds are long term investments. You have to pay a fee every time you make a transaction, so BUY AND LEAVE YOUR HOLDINGS ALONE. Just sit back, collect up the capital gains, dividends, and appreciated money. There are only 2 times you should mettle with your portfolio; when youre rebalancing it, or when you have reached your financial goals. One of my financial goals is to live off the dividends and appreciation of my investments, so that means the money that I invest will never be withdrawn, only the interest and dividends.

An important note: Just because a fund has gone up in the past doesn’t mean it will continue to go up in the future, there is still a chance that you could lose all your money. And whenever funds change managers, theres no guarantee the next manager will do as well as the one before him.

Do your homework and educate yourself before throwing your life savings into something! Start by checking out one of the books that I have recommended above.

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