V.4:1 (18-21): Mutual funds by Bill Dunbar

V.4:1 (18-21): Mutual funds by Bill Dunbar
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Mutual funds by Bill Dunbar

A basic look at mutual funds: who they are for, how to choose one, why and when to switch. Also included are several sources of information to use to get specifics when deciding on a mutual fund.

In the past, critics of the Dow Theory have said, why worry about the averages—you can't invest in the averages. Well, you can now, of course, by putting your money into index options or futures. But, with options, the house takes a big bite and you have to guess not only what the market is going to do, but also, within a few months when it is going to do it. That's a pretty tough combination to beat, but there is a much older and more reliable way to bet on the averages, one in which the odds are more in your favor—investment companies. Granted, you don't have the leverage, but leverage works both ways, and with just a little bit of work, you can do better than the averages by selecting the best funds or by timely swapping.

Investment companies can be classified as either open-end or closed-end. Closed-end companies have a fixed number of shares and they are traded on the market just like individual stocks at prices determined by supply and demand rather than net asset value (the total value of holdings divided by the number of shares outstanding). Open-end companies (usually called "mutual funds"), on the other hand, issue as many shares as they wish, depending on the amount of investors' money they have to buy securities. The mutual funds can then be divided into two categories, those that charge a sales commission (or "load") and those that don't (no-load funds). Superimposed on that grouping there is a cross-breakdown of innumerable categories by objective, such as capital growth, income, tax-free, or special industry group.

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