The term is recognized by most people, however the true facts about mutual funds are most often misunderstood. On Tuesday, November 11th, Dynamic Money Matters started a monthly series dedicated to Mutual Funds. Here is the recap of this weeks show......

Over the past 15 years, most American Investors have turned to mutual funds to save for retirement. Often it is the only type of investment a 401(k) or retirement plan offers its investors. Mutual funds can offer the advantages of diversification and professional management. But, as with other investment choices, investing in mutual funds involves risk. In addition, fees and taxes will diminish a funds returns. It is extrememly important to understand both the upsides and the downsides of mutual fund investing as well as how to choose the types of mutual funds that match your goals and risk tolerance.

What are Mutual Funds?

A mutual fund is an investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, other securities and assets. The underlining investments can be one type, such as stocks, or a combination of many, such as stocks, bonds, cd's, etc..  The combination of the mutual funds investments are called the funds portfolio. Each mutual fund has a professional management team that must state the mutual funds investment goal and then manage the fund according to that goal. For example, if a fund has a management goal of growth and it invests in 100% growth stocks, its management team must stay with that investment goal during all types of financial markets. The management team is obligated to its investors to remain a growth oriented fund. regardless of market conditions, the mutual fund is managed as a growth fund.

Each share of a mutual fund has a Net Asset Value (NAV), which changes after the close of the stock market (4:00PM) each and everyday. Each share that an investor owns, represents a investor's proportionate ownership of the fund's holdings and the income those holdings generate (if any).

Key Points:

Mutual funds are NOT guaranteed or insured by FDIC or any other government agency. Even if you purchase a mutual fund at your local bank and the mutual fund carries the banks name. You can lose your money investing in mutual funds.

The past performance is not a reliable indicator of future performance. Don;t let a sales person dazzle you by the past performance of last year's high returns/performance. However, the past performance of a fund is an indication of the mutual funds management and the funds volatility over time. In simple terms, you can estimate what the down side loss may be and what the upside gain maybe. Again, nothing is guaranteed and nothing is for sure in the world of mutual funds.

All mutual funds have a cost associated with them. If a sales person tells you there are no costs- run!! Just kidding, don't run, just don't believe him:) There are many funds with extremely low management fees, and a low management fee does not indicate a poor performing fund. So before you invest, compare the fees!! Let me break it down for you.....If your mutual fund returns 7% at the end of a year. The management of the fund will collect their fee first, and then pass a return to you, the investor, of 6%. So if the management fee is .5% you will receive a return of 6.5%, good for you :) If the manangement fee is 1.5%, then you wil receive a return of 5.5%, not good for you:(

 As always, I encourage all of you to stay informed. Education is key to wise decisions!!