Gardner: Investing in mutual funds, a conclusion (column) |

Gardner: Investing in mutual funds, a conclusion (column)

In my last two columns I have explained what mutual funds are, why they provide an easy way to save for the future and how to invest in them. Today we will cover some final details about them before moving on to stock.

Net asset value, or NAV, is the current market value of all the securities held by a fund, less any liabilities, on a per share basis. Open-end, no-load mutual funds are bought and sold throughout the day with the NAV being recalculated once a day. This is unlike a stock, which has a constantly fluctuating price throughout the day based on trades. You will see the NAV posted online or in the newspaper as the share price at the close of the market the day before. Shares purchased by buyers are newly issued by the mutual fund to fill their order, and the fund will continue to grow until the investment company makes a decision to close the fund. That is why you see some ultra large funds like Fidelity’s Magellan Fund (FMAGX), which was started in 1963 and is legendary. Being so big, though, has its disadvantages. Fund management cannot be as nimble because of the sheer size. This can affect the potential returns for the fund. Closed-end investment companies offer a fixed number of shares that are actively traded between investors like stock on the secondary market. The investment company is no longer involved once the shares are issued. Investor expectations as well as the market outlook generally cause closed-end investment companies to trade at a premium or at a discount to their NAVs.

One of the most beneficial aspects of mutual funds is that each one is usually invested in hundreds of companies.

Another benefit is the professional management of mutual funds. As an investor, you pick the fund and the manager takes it from there.

Needless to say, there is a fee associated with the management. This fee can be anywhere from just under .05 percent to 4 percent. One of the major complaints of mutual funds is the fees charged by investment companies. When you choose a fund, it is important to review the fees as well as the past returns and make sure they will not create too much of a drag on the fund’s performance. Full-time management can be well worth the expense, if reasonable, and it will more than likely give you a higher net return over time than if you managed a portfolio of stocks yourself. In addition, 12(b)-1 fees are charged by many funds to cover their distribution and marketing expenses. The maximum that can be charged annually is 1 percent. Determine if a fund you are considering has them and whether they are excessive. We have already touched very briefly on loads. A load is a fee that some fund families charge to buy into their funds. I have always compared it to paying points to get a lower interest mortgage, and I believe it is unnecessary to pay as much as 5 ½ percent for the right to own a fund. My personal opinion is that there are too many good funds available to spend money on loaded funds. The good news is that if you decide to use index funds instead of actively managed funds, you will have some expense, but you will not have any of the previously mentioned fees.

Nancy Gardner is a certified financial planner. Send questions to

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