Important Mutual Funds Concepts

Are you thinking about investing in the stock market? If you are, it is highly likely that you are considering investing in Mutual Funds. A mutual fund gives you stock market exposure, diversification, and the professional selections of a seasoned stock picker.

Most average investors park at least some of their money in Mutual Funds. Often though, they are confused by some of the terminology and concepts associated with Mutual Funds investing. Sometimes, this is not a big deal, whereas other times ignorance of a few key concepts can severely impact their long-term returns. Here’s a few key Mutual Fund concepts.

Load: These are up-front fees that Mutual Funds charge for investing in the fund. Whatever load you pay goes straight to the Mutual Funds and anyone that happened to be marketing the fund. People that try to sell Mutual Funds that charge loads try to claim that they are somehow better than other Mutual Funds. This is nonsense. Paying a load is simply paying an extra, unnecessary fee. Always invest in no-load Mutual Funds , otherwise you are just wasting 5% of your investment by paying someone's commission.

NAV: Net asset value. This is the closing price of the Mutual Funds after a day's trading. You can see how well Mutual Funds are performing by changes in its NAV.

Management Fee: These are fees that Mutual Funds charge you for investing your money. All Mutual Funds charge a management fee; otherwise they would not be able to operate. However, you do not want to be needlessly paying too high of a management fee. Look for Mutual Funds that charge management fees of 1.5% or less.

Morningstar Rating: This is the rating the Mutual Funds was given due to its past performance compared to its peers. While past performance is not a guarantee of future performance, it is a somewhat useful indicator in helping you decide whether or not you want to trust your money to certain Mutual Funds or not. Remember though that the Mutual Fund's performance will largely be a result of the fund's chief manager. If the manager changes, then looking to the past performance of the fund is somewhat worthless.

Net Assets: This is how much money the Mutual Funds manages. Some mutual funds just manage $100-$200 million of investor's money. Others manage up to $50 billion. The advantage of larger Mutual Funds is that they sometimes charge lower fees due to efficiencies of scale. However, in general, smaller Mutual Funds are better. This is because they are more nimble and can invest in more of a variety of companies. The larger mutual funds have to invest in very large companies. After all, if a $50 billion mutual fund invested in a $500 million, just parking 1% of the fund's assets would buy the whole company!