Choosing Mutual Funds - Part 1
March 28th, 2008 at 12:40 amWelcome to the latest series - "Choosing Mutual Funds"
In this series, I will be sharing how I choose mutual funds. It should be noted that I do not sell investment products nor am I professional in the mutual fund industry. This is my own personal philosophy for choosing mutual funds.
Part One - What is a Mutual Fund?
This is THE number one question that I receive when I am teaching the Financial Learning Experience and Financial Freedom Experiences. Mutual funds can certainly sound confusing - especially when there are so many options available. So for those who do not know what a mutual fund is, let me explain it the best I know how.
If something has been FUNDED, it means that money has been given to it.
If you and I come to a MUTUAL agreement, it means that we both were involved in making the agreement.
So if you and I have MUTUALLY FUNDED a project, then it means that we both provided money for the project.
A MUTUAL FUND means that you and I have both put our money in the same place. It is not unusual for a mutual fund to have over 5,000,000 people MUTUALLY FUNDING the same investment.
So we have mutually funded an investment along with three or four million of our closest friends. The amount you have invested is different from how much I have invested, but it is all in the same place. I have drawn a picture to illustrate this. Please marvel at my graphic art skills.
So, we now all understand that we have mutually funded this investment and that it is called a mutual fund. The next question to answer is: "Where does the money go once it is in the mutual fund?"
Well, each mutual fund has a specific objective. Some mutual funds have an objective to produce income. Others have an objective to maximize the long-term growth of the invested money. Still others may have an objective to invest only in international companies. The bottom line is that each mutual fund has a specific objective or charter.
Based upon a mutual fund's charter, the mutual fund managers will purchase part-ownership in a lot of companies. I have employed my terrific graphics skills to illustrate this.
The Mutual Fund managers use the money provided by you, me, and three million of our closest friends to purchase ownership in anywhere from 50 to over 1,000 companies. As these companies earn profits and grow, the value of the investment grows. This means that each individual who owns a portion of the mutual fund can enjoy that growth as well.
So that is what a mutual fund is. I hope that it helped those who may have been confused. In the next part of this series, I will discuss how individual investment goals help guide one's mutual fund selection decisions.
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