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Mutual funds for dummies - Tyson E

Tyson E. Mutual funds for dummies - Wiley publishing , 1998. - 425 p.
ISBN 0-7645-5112-4
Download (direct link): mutualfundsfordummies1998.pdf
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All right, let me get more specific: A mutual fund is an investment that invests in other investments. In other words, when you invest in a mutual fund, you’re contributing to a big pile of money that a mutual fund manager uses to buy other investments, such as stocks, bonds, and/or other assets that meet the fund’s investment criteria.
Differences in investment criteria are how mutual funds broadly categorize themselves, analogous to the way that an automaker labels a car a “four-door sedan” or a “sport utility vehicle.” This helps you, the buyer, have a general picture of the product even before you see the specifics.
On the car lot, of course, it’s taken for granted that you know what “sedan” and “sport utility vehicle” mean. But what if the car salesman asks you whether you want a Pegasus or a Stegasaurus? How can you decide if you don’t know what those names mean?
Mutual fund terms, such as “municipal bond fund” or “small cap stock fund,” are thrown around too casually. Fact is, thanks to our spending-oriented culture, the average American knows cars a lot better than mutual funds. In this chapter and the next, I explain the investment and mutual fund terms and concepts that many writers assume you already know (or perhaps don’t understand well enough themselves to explain to you).
Chapter 1: Investments Primer
Piecing together your financial puzzle
Many people plunge into mutual funds without first coming up with an overall financial plan. Would you start out on a long trip without picking a destination? Before you ask for directions, you have to know where you're trying to go. And you have to know what you need and want to do along the way.
Some investors leap into the task of picking a fund before they know what they want their mutual funds to do. They may choose fine funds, but they also may make big financial planning mistakes that lead them to pay far more in taxes than they need to.
If you haven't planned, you're not alone. You work hard and want to have a life; developing a financial plan may be the last thing on your mind when the weekend rolls around. But in recent years, too many people have found out the hard way that recessions and natural disasters aren't just bad things that happen to
other ppopio You need a sntolv net in case you lose your job or are hit with unexpected expenses This s.itoly nut needs to be ne'cstcd in something that you -an sell quickly;.something whose value you can count on to not drop at mronvemuii' moments isee Uhaptui 71
A great deal of what's written about mutual funds completely ignores the financial planning implications of mutual fund decisions In some cases, the wntei doesn't have enough spaeo to go into these unpoitant details In utlii-i cases, waiters simply don't know what they're overlooking.
If you've dutui mined vuur financial nuods and goals alicady. tenific1 Undeistanding yoursell is a good pail nf the bailie But don't shortchange yourself by diving in before you put on your mask and flippers. Be sure to dress for investing surrussi And be sure to read Chapter 3.
Making Sense of Investments
Our eyes can perceive dozens of different colors, and hundreds if not thousands of shades in between — so many colors that it’s easy to forget what we learned back in our early school days, that all colors are based on some combination of the three primary colors: red, blue, and yellow.
Well, believe it or not, the world of investments is even simpler than that. The seemingly infinite number of investments out there is based on just two primary kinds of investments: lending investments and ownership investments.
Lending investments: Interest on your money
When your buddy Bob forgets his wallet at home (again) and you agree to spot him $7 so that he can buy lunch, you’re a lender. Although it’s your money buying Bob’s lunch, Bob owns the lunch that he’s buying, not you. And when he retrieves his wallet, he’ll hopefully pay you back the $7.
Part I: The Why and How of Mutual Funds
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If you loan the money to Bob with the condition that he must share his potato chips with you, you’re charging interest and, therefore, profiting from the loan (unless, that is, he buys barbecue-flavored chips and you don’t like them). Lending is a type of investment in which the lender charges the lendee a fee (generally known as interest) until the original loan (typically known as the principal) gets paid back.
Familiar lending investments include bank certificates of deposit, U. S. Treasury bills, and bonds issued by corporations such as AT&T. In each case, you are lending your money to an organization — the bank, the federal government, or AT&T — that pays you an agreed-upon rate of interest. You are also promised that your principal (the original amount that you loaned) will be returned to you in full on a specific date.
The best thing that can happen with a lending investment is that you are paid all the interest in addition to your original investment, as promised. (In Chapter 8, you see how you can also make money or lose money on lending investments when interest rates fall or rise.) Although getting your original investment back with the promised interest won’t make you rich, this result isn’t bad, given that the investment landscape is littered with the carcasses of failed investments that return you nothing — including lunch money loans to colleagues that we never see again!
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