Buying and Monitoring Your Mutual Fund Shares
By: Source: AARP.org Date Posted: 2005-03-20 12:08:23
Once you select a mutual fund, you can usually buy shares in that fund by completing an application and sending a check. Once that transaction is complete, it's your job to keep an eye on your mutual fund to make sure it keeps performing for you.
What You Should Know
Before you open an account with a mutual fund, you have a few decisions to make:
- Would you like an individual or joint account?
- How much will you invest? In some cases, the fund requires a minimum investment.
- Do you want the fund to reinvest any dividends you earn? You can ask the fund to either reinvest your dividends and capital gains or send you dividend payments. In either case, you will owe taxes on the profits you earn, unless your mutual fund is an Individual Retirement Account.
- What fund services would you like to use? Some funds allow you to transfer money to and from your bank account by phone. Others let you redeem your shares by writing a check. These and other extra services are part of what makes mutual funds attractive to many investors.
Making Many Small Investments
Some mutual funds allow you to make smaller investments at first if you agree to make regular investments over time. In some cases, you may be able to have money transferred to the fund automatically from your bank account.
Regular investing, sometimes called "dollar-cost averaging," has several advantages. First, it disciplines you to invest regularly in your mutual fund, which makes your nest egg grow faster. Second, it may allow you to pay less for your mutual fund shares. The price of mutual fund shares changes each day. So, the investor who makes regular, small investments will probably pay a lower overall price-per-share than someone who buys all of his or her shares on the same day.
Experts suggest that dollar-cost averaging works best for those who have a small amount of money to invest at a time. Investors who have large sums of money - money received from an inheritance or a home sale, for example - often choose to invest that money all at once, rather than a little bit at a time.
Monitoring Your Mutual Fund Shares
Monitoring your mutual fund is like monitoring any other investment. For specific instructions, see Managing Your Investments.
Consider making regular contributions to your mutual fund. It will discipline you and may get you a lower price per share.
For More Information
The Alliance for Investor Education
You can test your knowledge about mutual funds on a Web site run by the Alliance for Investor Education. The site also features a mutual fund fee calculator and a "Guide to Understanding Mutual Funds."
URL: http://www.investoreducation.org
The Securities and Exchange Commission (SEC)
The SEC Web site offers a variety of useful information for investors. Under "Investor Education," look for online publications about mutual funds and Interactive Tools, including a Mutual Fund Cost Calculator that will help you compare the true dollar cost of mutual funds. Use the EDGAR Database (listed under "SEC Filings and Forms") to find and read a mutual fund's prospectus.
URL: http://www.sec.gov
The Investment Company Institute (ICI)
ICI is a trade organization for the mutual fund industry. The group publishes a host of information about mutual funds, "Questions You Should Ask Before Investing in Mutual Funds."
URL: http://www.ici.org/funds/abt/index.html
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