Long Term Planning

Mutual funds

A mutual fund is an investment pool of treasury bills and specific types of stocks like high tech, big company, smaller company, and or even junk bonds. The mutual fund hires a fund manager (just like money market mutual funds do), this may be one person or a company. This company or person makes the daily investment decisions for the mutual fund. This person or company has experience in trading and investments.

There are 4 different types of returns you can expect to get from your mutual funds. They are dividends, short term capital gains distributions, long term capital gains distributions, and capital gains or losses on shares you may sell.

Dividends come from many different areas. If the mutual fund owns bonds, the interest earned on the bonds becomes part of the dividend pool. If the mutual fund owns stocks, the dividends paid by stocks to the mutual fund then become part of the dividend pool that is available to be dispersed to the mutual fund’s shareholders.

Dividends are dispersed by the mutual fund each month, quarterly, or even less often. The prospectus (document of intention) will tell you how often dividends are dispersed. Typically, these dividends are fully taxable when the mutual fund is held in a taxable account. In an IRA or similar account, they are not taxed in that year if they stay within the account.

Short term capital gains distributions are from investments sold by the fund that were held by fund for less than a year. Long term capital gains distributions are from investments sold by the fund that were held by the fund for no less than a year. Now, capital gains or capital losses on sales of mutual fund shares come when you sell any or all of your shares in the mutual fund itself.

Mutual funds must tell you in advance how it intends to invest the money within the fund. This is done in a document called a prospectus. The fund may list the types of investment it will make. Meaning, it will say whether it will invest in only bonds or high dividend paying stocks or only stocks in high technology companies. At times, these prospectus’ may be a bit more vague saying it will invest in the stock in high quality companies that are expected to grow at rates above the growth rate that is expected for the Dow Jones Industrial Index.

In the beginning, you will most likely want to invest in funds that hold well diversified portfolios of a very high quality US company(s). AT a while, as you get more savvy about your investing and learn a bit more, you may find yourself expanding out so that you have small holdings in more concentrated industries.

Mutual funds (especially stock mutual funds), are many times used for long term savings objectives where you do not have to posses the money for 10 years or longer. This is where your retirement saving will start. Mutual funds are sold through stockbrokers, registered reps of mutual fund companies, or even directly from the company itself. Insurance companies sell variable annuities whose sub accounts appear as mutual funds, but are actually different. Most company retirement plans provide mutual funds to their employees within the company’s retirement plan itself.

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