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If you're thinking about investing in a mutual fund, you'll want to know exactly what you're signing up for. A mutual fund calculator can help you foresee the potential value of a mutual fund investment.

In this guide, we'll walk you through everything you need to know about mutual funds including why using a mutual fund calculator is key to your decision.


Why use a mutual fund calculator?

A mutual fund calculator can help you understand what you are investing in.

This financial tool does this by figuring out the expected growth of a mutual fund. The calculator asks you to input certain details and when it's all said and done, you'll have your final yield and expense break down.

To get started, you'll need to know details about the fund, such as the rate of return, sales charge (if applicable), and expense ratio. These can all be found in a mutual fund's prospectus.

What is a mutual fund?

A mutual fund is one of the easiest ways for someone to invest in the stock market. It's a pool of money from individuals, companies, and organizations that gets invested in a diverse selection of securities.

Securities are stocks, bonds, and short-term debt. A fund manager handles where the money gets invested. There are different fund managers that specialize in different investments.

For instance, a fixed-income fund manager strives to get the highest yield at the lowest risk. So, a long-term growth manager attempts to beat the Dow Jones Industrial Average or the S&P 500 in a fiscal year.

Components Of A Mutual Fund

The combined holdings of the mutual fund are a portfolio. There are four main categories of mutual funds:

  • Money Market - Funds with low risks.
  • Bond Funds - Higher risks than money market funds.
  • Stock Funds - Investments in corporate stocks.
  • Target Date Funds - Hold a mix of stocks, bonds, and other investments.

Types Of Mutual Funds

There are also four types of mutual funds:

  • Closed-end - Funds with limited shares
  • Open-end - Funds with unlimited shares
  • Open-end no-load fund - Unlimited shares, no sales charge
  • Open-end load fund - Unlimited shares, sales charge applicable

These all involve the number of shares a fund has and whether a commission gets paid or not.

Remember, mutual funds are professionally managed. This means fund managers charge fees depending on how much and what they're managing. Make sure your mutual fund prospectus details these fees.

How much does a mutual fund cost?

The minimum initial investment is around $3,000 but some mutual fund companies allow you a lower amount, like $100.

These companies may insist on an automatic investment plan to get that low initial price. This could be a commitment to invest a set amount every month for the life of the term.

If a mutual fund is in a 401(k), there's no minimum investment amount. The only thing required is that you complete your employer's paperwork.

Are mutual funds good investments?

That's a loaded question. The stock market has risks but it also has rewards. You need to define what your goals are when it comes to investing.

Do you plan on using the funds soon? If not, focus on long-term growth. Do you like risks? If you answered no, focus on safety.

Whether an investment is "good" or not depends on where you're investing your money and if it's the right investment for your goal.

What is a typical expense ratio?

An expense ratio is the cost mutual fund companies charge to manage your portfolio.

For an actively-managed portfolio, a low expense ratio is 0.5-0.75%.

An expense ratio is high when it's more than 1.5%.

Do all mutual funds have fees?

Yes, they all do. The difference is how much those fees are and how they get paid.

The SEC (Securities and Exchange Commission) put Rule 12b-1 in place years ago to ensure fund managers get paid for managing a mutual fund in all but Class A funds.

Financial Industry Regulatory Authority (FINRA) limits the size of the 12b-1 fees to 1%. These fees get deducted from the fund's assets so you don't see them on your statement.

Even a no-load fund has fees, they're only clear of any sales charge.

What is the average rate of return of a mutual fund?

Like most things when it comes to investing, the average mutual fund returns are dependent upon certain factors.

The S&P 500 has an average of 9.8% over the last 90 years. But, between 1928-2016, the S&P 500 returned 5-10% only six of those years.

That 5-10% is what most people think is a "typical" annual return. In reality, more than a quarter of those years saw 20% annual return or more. Nine to 13 of those years, the S&P 500 saw 15-20% annual return.

Mutual funds earn less than the S&P 500. For instance, the average mutual fund returned an average of 6.92% over the last five years.

An experienced fund manager or analyst can recommend funds based on your goal, which may be higher or lower than the average.

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