Monday, March 19, 2012
Mutual Funds: What and Why?...by Austin the Realtor
Now, on to some investing information that can be helpful. I’m sure many, if not all, of you heard of the stock market - buy low and sell high, IPO, Dow Jones, Nasdaq and many other investing related terms. There are even movies that touch on this fast paced world; “Wall Street 1 and 2”, “Trading Places” and “Boiler Room.” But how can all this information help you? You probably already invest but may not know what you invest IN.
Today we are talking Mutual Funds. The 2 most popular vehicles in which mutual funds are utilized are your retirement through your job (401k or 403b) and 529 Plans for college savings.
Definition of Mutual Fund:
- An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Read more: http://www.investopedia.com/terms/m/mutualfund.asp#ixzz1lEYbdak9
This means you have the opportunity to invest in many big name companies with as little as $25 a month. You choose a mutual fund based on its objective: Capital Appreciation (hope the value goes up at the risk of it going down), Preservation of Capital (hope the value goes up but without risking too much of what I put in), or Income Based (pay dividends without my investment moving much).
Your decision would be based on your goal and “suitability.” This means if you are 65 and retired, you wouldn’t invest in a mutual fund where you risk your investment. You may be more looking at Income Based to save your money and receive dividends.
For the most part, mutual funds are long term investments - usually for 5-10 years out or more such as college (529 plans) or retirement. The good thing is that it is managed by a professional portfolio manager so you don’t have to sit in front of your TV watching the Dow deciding when to buy and sell. That’s his job.
401k or 403b – if your job offers it, participate. Some jobs match your contribution. These are pre-tax funds so you lower your taxable income. The intent is that when you retire, you are in a lower tax bracket so you will be taxed less when you withdraw - plus it’s invested over time.
529 Plans – start now for your children. Depending on the state, the earnings are tax free. Plus, it’s transferable to other children. Lastly, you can use it for yourself for higher education expenses. Google: 529 Plan and your state for more info.