Can someone explain mutual funds to me?

I am thinking of putting money into a mutual fund, and I understand the general idea, but I'm a little confused and need some help.

How exactly do they work? How does the whole process work if you want to put money into one? I also heard that you have to pay taxes on it if you have enough money in there, how does that work?

Also, do you have any advice for me if I go about doing it?

Thanks.

Jam it back in, in the dark.

Mutual funds are essentially collections of stocks merged into one group. While they don't have the potential to make as dramatic gains as individual stocks, they also don't have the potential to drop as dramatically; thus they are lower-risk investments than stocks.

Most funds charge managing fees to pay the salaries of the person who does the research to decide what stocks to invest the money in; these can be low or high. The lowest managing fees are almost always on index funds - funds which simply follow an index such as the S&P 500.

My personal advice is to pick a nice mix of low-capital and high-capital and foreign and domestic funds - be sure to diversify. At the moment, a couple of solid choices would be the Vanguard S&P500 and Health Care index funds.

There's nowhere I can't reach.

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Good tool for learning mutual funds. Thing is, the majority of mutual funds never seem to beat the overall market (index), so you're probably not better off with one or the other.

Another thing to add. You can have a mutual fund in different types of stocks: example, industry goods (energy, transportation, real estate - don't do this, etc.), international (Asia growth, Latin America, Europe, etc.), growth, value, etc.

Some mutual funds do indeed beat the market and can make marketable gains (recently Latin America - I've seen 50% from some for YTD - and Asia), but historically do not expect this from a random mutual fund with American stocks.

Saying that mutual funds are less risky depends on what type you are looking at. If you are indexing, it is not risky. But if you are investing heavily in international stocks, then your risk is pretty darn high.

You pay taxes on the profit made in stocks regardless if it's a sole company ownership or a mutual fund. Similar to interest in bank accounts.

This thing is sticky, and I don't like it. I don't appreciate it.

Will I have to fill out tax forms or do they deduct it automatically?

How ya doing, buddy?

Assuming your income is about a certain level (varies depending on marital status and category of employer, and they're all reasonably low - $400 if you're self-employed, for instance) you HAVE to file federal tax forms no matter what, even if it is automatically deducted. Same with your paycheck.

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Will they send me the tax forms in the mail (or any information regarding tax forms), or do I have to get all that stuff myself and they just assume that I know how to report the money from the mutual fund?

What kind of toxic man-thing is happening now?

I would think it'd be like anything else. The profit made gets lumped into the gross sum of money you made during the year, and then the government taxes you on that.

How ya doing, buddy?

Originally Posted by Smelnick

I would think it'd be like anything else. The profit made gets lumped into the gross sum of money you made during the year, and then the government taxes you on that.

If taxes were that simple, do you honestly believe there would be 500 page tomes dedicated to the laws every single year?

As far as your mutual funds go in the eyes of the Internal Revenue Service, it all depends on what happens with them.
If they pay dividends, you're taxed on those (it also depends on whether or not the dividends were qualified)
If you sell it at a gain, you're taxed on it.
If you sell it at a loss, it can be an exclusion of gross income.

Amazingly enough the IRS website has a shit load of information on them!

Go figure.

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Ah, the difference between Canadian taxes and your taxes. I guess it's simpler for me because I only have income tax and I never have to pay yet because I'm still a student. I always get money back. Sorry to confuse.

Jam it back in, in the dark.