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Financial Literacy

Financial Literacy

Home Finance Investing Buying Mutual Funds

Buying Mutual Funds

A lot can happen in 24 hours.

You can get a date for prom, win the lottery, break your leg, or find out that the tooth fairy isn't real. (Sorry.)

A lot can happen to mutual funds in 24 hours, too. Mutual funds are priced in 24-hour cycles using something called NAV (Net Asset Value). Here's how it works: a highly trusted and fancy money person inside the mutual fund company tallies up all the closing bids on shares at the end of each day. Bids refer to the price people are willing to buy a stock for—that's what matters.

Sounds simple enough, but there's a lot that can happen to make the process more complicated.

Some mutual funds allocate private or other types of investments based on a specific percentage. For example, what if the 1% position in your fund was Google and, all off the sudden, the stock went up a lot—by five times, a hundred times, or more? How would you price the NAV so that new investors in your fund would have a good sense of the value?

Another problem: mutual funds sometimes have a lot of an illiquid stock. If they try to sell or get out of that specific stock, their decision to sell can push the price down a lot. For example, if a mutual fund has half of the stocks of a smaller company and decides to sell all of its shares, the price of that stock will plummet. It doesn't happen a lot, but it can happen. To deal with this type of situation, some funds have a "liquidity discount." Although fund managers still have to guess, they stay quite conservative. (During the fiscal crisis of 2008 and 2009, mutual funds and their managers didn't receive the same under-a-microscope treatment as other investments.)

Ready to Buy?

So let's say that you're ready to buy mutual funds. How do you do it?

(1) Choose the right mutual funds for you.

  • Consider how much risk you're comfortable with and how much you're willing to pay in fees and other charges. 
  • Take a look at different funds, comparing where the money goes. Is there a good balance of funds and is your money going to companies you want to invest in? Is there a good range of bonds and stocks, and are you comfortable with the industries where your money is being invested?

(2) Buy.

Once you're ready to spend your cash, you'll find many places willing to take your money. You can buy mutual funds directly from fund companies like Fidelity or T. Rowe Price, or you can buy from a "supermarket" of funds where you can open a brokerage account. You can also go to a human (or zombie) broker or financial institution to buy. In some cases, you can buy mutual funds as part of your 401(k) retirement account through your employer.

(3) Manage your mutual fund.

You can't just buy a mutual fund and take off for a sunny beach, waiting for your money to grow.

Well, you can, but it's a great way to get a sunburn while going broke.

After you've bought your mutual fund, you're going to want to take a look at it. Is the mutual fund performing as you thought? Are the fees and costs just as promised? Does the mutual fund still meet your long-term money goals? Don't get too hasty about dumping a fund if it doesn't grow right away, but don't just assume your mutual fund is going to make you money.

Investing in mutual funds is easy (spending money is always easy) but taking the time to actually read those shiny brochures and e-letters from your broker increases the chances you'll actually earn some returns on your (not-so)-hard-won cash.

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