Trading Mutual Fund Shares
Now that you're better acquainted with the pros and cons of mutual fund investing, you can take the next step. There are many factors to evaluate in light of each investor's goals. But as with all investment opportunities, there's one very important question you need to address: How will you make money in mutual funds?
Despite common complaints about high operating costs and commissions, mutual funds have shown some tremendous results in recent years. How long the trend will continue depends on a wide variety of factors, including among others the economy, the stock market, and the number of successful fund managers.
You can profit from investing in mutual funds the same way you profit from stock investing: If you sell shares of your mutual fund at a higher net asset value (NAV) than you paid for them, you've made a profit. The fund acts as a single unit, and its total return is based on the performance of all the stocks, bonds, and other securities held. So if some stocks within the portfolio aren't performing very well, you can't simply get rid of those losers. The same goes for high performers within the fund; you can't sell them off to cash in on a strong market price. What you can do is sell off your shares of the fund as a whole, and hope that it's current value is more than what you paid at the outset. You may also profit from the fund's performance, and strong performance increases the NAV.
To get started, you can buy and sell mutual fund shares directly from a mutual fund company. All you have to do is call (or e-mail) the fund company, and request an application kit. You fill out a few forms, write out a check, and mail the whole package off to the company. When you're ready to sell, you call or write to the company to let them know exactly which fund and how many shares you want to sell; then you just wait for the check (or direct deposit) to come.
For people who plan to invest in several different funds — especially if they're in different fund families — it may be easier to go through a discount broker. Yes, you'll pay a fee (usually a fairly small fee), but you won't have to slog through reams of paperwork on your own. Rather, you'll fill out a single account application. Another benefit: instead of getting several account statements from all the different fund companies, you'll get an all-in-one statement from your broker, which is very handy at tax time.
