Have you considered investing in the stock market but you weren’t sure where to put your money? You are probably familiar with mutual funds. They are very common in 401k plans and that may be the best place for them. A mutual fund is an investment program funded by shareholders that trades in multiple holdings and is managed by a professional investor. The nice part of mutual funds in a 401k is that the taxes are deferred to a later date.
Mutual funds can be a good place to invest when there isn’t the time or understanding to invest directly in stocks or bonds. There are some issues to be aware of along the way, in particular the taxes. So, if we buy some shares stock and then sell it, we have either a gain or loss and we have to report it on our tax returns. Cash will be paid and returned to us. In a mutual fund, we can buy the same dollar amount of shares in the mutual fund. The fund then buys and sells shares of stock. The fund owns shares of a company and we own shares of the fund. Our only personal cash transaction in this case would be when we bought shares in the fund. Typically when a mutual sells shares, it reinvests the proceeds from the sale of shares within the fund back into the fund by purchasing other shares. We most likely won’t receive any of the cash proceeds but instead become an indirect shareholder in new shares of a different stock. The benefit being that we don’t need to pick, choose, and trade ourselves. But be aware that the gain or loss within the mutual fund is taxable to us. The fund manager will report this on the annual tax form 1099-DIV. The same holds true for interest payments or dividends within the fund.
There is a lot information available on mutual funds. They tend to have a general guideline as to how they invest. They typically focus on forms of risk, reward, size, and time. For example there funds that invest only in stocks listed as part of the Dow Jones Industrial Average. Others focus on emerging technologies. Some are based on asset preservation instead of asset growth. Funds also charge fees.
We don’t need to be on the inside of the next IPO to benefit from the stock market or to invest in bonds. I found a place with a quick on line search that will open an account for a little as $50.