Investing in Mutual Funds
March 18, 2011
Over the past decade, mutual funds have become one of the most popular ways for Americans to invest. Mutual funds have three benefits that have contributed to their popularity - diversification, professional management and convenience.
The concept of a mutual fund is quite simple. A mutual fund is a company that makes investments in other companies. When you buy shares in the mutual fund, your money is pooled with money of other investors and the mutual fund buys a diversified portfolio of stocks and/or bonds of other companies. The investment manager, or portfolio manager, is responsible for the buy, sell and hold decisions of the fund.
Your benefits include any distributions the fund makes from interest or dividends it receives and any appreciation in the underlying value of the securities the fund holds. You can usually have any distributions made to you in cash or reinvested for additional shares.
Factors to consider when choosing a mutual fund
Even within the general categories of stock and bond funds, there are categories like large capitalization stocks, small caps, global and utility funds. There are also bond funds comprised of Treasuries, high grade corporate bonds, municipal bonds, high yield bonds and all types of combinations thereof. A financial advisor can help determine what type of fund matches your investment objectives and risk tolerance.
You want a fund that will perform well. However, there are no guarantees of performance. Past performance is not a sure indicator of future results. You should examine the performance track record of funds you are considering. Be sure to look at both the long-term returns and the short-term returns.
Another issue - Income tax consequences
The income tax consequences of owning a mutual fund are a bit complex. Mutual funds pay no income taxes provided they abide by IRS rules. Any distributions made by the fund are taxable to the shareholders and reported on a Form 1099. The tax rules also require the fund to distribute any net capital gains it earns during the year from the sale of securities it owns and those gains are also taxable to the mutual fund shareholders.
Be sure to keep good records and to consult your tax advisor about the tax aspects of investing in mutual funds.
Mutual funds offer many conveniences to make investing easier. However, there are risks. Be sure to do your homework. Read the mutual fund prospectus carefully before making any decision.
Use the expertise of a financial advisor to help make an informed decision suited to your objectives. For all your investment needs, Hometown Investment Services is here to help.
Information from Hometown Investment Services, a wholly-owned subsidiary of Home Federal Bank.
Investment and insurance products are offered through Fintegra Financial Solutions, an independent registered broker dealer, member number FINRA/SIPC, OSJ phone 763-585-0503. Hometown Investment Services and Fintegra are not affiliated. Investment and Insurance Products offered through Fintegra: • Are NOT Bank Deposits • Are NOT FDIC Insured • May Lose Value • Are NOT Insured By Any Government Agency • Carry NO Financial Institution Guarantee.
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