In the last decade or so, many investors have turned to mutual funds to accomplish their retirement and savings goals. This post has some stock market basics about the mutual fund industry. If you are planning on using this as a component to your strategy, here are some things you should know.
Many people think that funds are safer than other investments. This is a common stock market for beginners type of mistake. In reality, just like other financial instruments, they also carry a measure of risk that you need to consider. In addition, it also carries tax implications that will eat into you returns. And lastly, fund investing strategies also involve calculating in management fees that can go from very high to almost nothing depending on which route you go.
Mutual funds are not insured by the FDIC like your checking or savings account at your bank. Bank accounts are insured by the Federal Deposit Insurance Incorporation up to $100,000. If you choose a fund investment strategy, it will not be sheltered like a bank account will.
Another important thing to remember is that past performance is very rarely indicative of future earnings. For some funds the returns may be consistent year over year. But research is showing that most mutual funds rarely beat the market over time. So beware of this as you evaluate which mutual funds to invest in.
Also, funds have management fees that you must incorporate into your investing strategy. Unlike investing directly in individual stocks, bonds or other assets, mutual funds have fees that will diminish your returns. It needs to be built into your earnings projections when you are shopping for funds.
The only difference is if you invest in an ETF, also known as exchange traded funds. These are essentially mutual funds that are traded on the open market. The only cost with these is the trading commission, and many brokers are beginning to offer breaks on this for certain ETF’s. For more information on ETF’s, just look up stock market basics for ETF’s.