by Michael Sanibel

Created on: August 17, 2008   Last Updated: August 20, 2008

The How and Why of Mutual Fund Investing.

Mutual funds are an excellent investment vehicle for people who don't have the time or expertise to do their own research and manage their individual investments. The funds are professionally operated by experienced managers who are paid by the fund participants to do all the dirty work for you. Additionally, there is a wide variety of funds available that specialize in various financial instruments such as stocks, bonds, foreign investments, and real estate. The funds allocate risk by spreading your money around and continually reviewing the performance of the assets in the portfolio.

The beauty of mutual funds is that you can choose a part of the economy that you want to invest in, without having to select individual companies. For example, if you are a fan of internet companies like Google and eBay, there are funds that buy an array of stocks only in that industry. You get to participate in the success (or failure) of Google without having to put up the $500 needed for just one share of stock. One share of a mutual fund entitles you to fractional ownership in every company contained in the fund's portfolio, as well as your share of all dividends and capital gains that are generated.

The investment options are almost limitless, from funds that invest solely in pharmaceutical companies to funds that buy companies that are considered "green-friendly." Or maybe real estate is your thing but you don't want to spend the time and endure the aggravation that goes with owning rental property. There are several funds that are invested in real estate trusts and other instruments that allow you to participate in this market without all the problems of managing it yourself.

Like any investment, there is risk associated with mutual funds, but it is mitigated by the diversity of each portfolio. The fund is required to send you a prospectus that will show the positions it maintains in every company and how it is weighted by number of shares and current market value. It will also provide a monthly statement that updates the information for each position. While these funds moderate your downside risk, they somewhat limit your expected returns. By diversifying the portfolio, this allows the increased value on some stocks to offset decreases on others. The goal of the fund manager is to ensure that the profits consistently outnumber the losses.

The annual returns of mutual funds vary depending on what sectors they are invested in and the

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