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...average investor afraid of making mistakes. If the managers of the mutual funds are frozen then what's the average investor to do? This report discusses some of the investment concepts and goals that you should consider when you invest in mutual funds.
Investment Basics
Knowing key terms and concepts is important. There are two general concepts to consider when choosing mutual funds: total rate of return and risk.
Rate of Return
The total rate of return indicates how much fund has increased in value over time. The rate is figured on the change in value of the underlying stocks or bonds in a fund, plus the income generated from those stocks or bonds.
It is usually expressed as an average annualized percentage figure--that is, the percent of increase in value for a year, averaged for several years.
For example, if a fund has an average five-year total rate of return of 10%, this means that for the last five years--if averaged out--it increased in value 10% per year. If $10,000 had been invested five years ago, it would now be worth $16,105. The value of the fund increased $6,105: $5,000 is the result of the straight 10% return, and the additional $1,106 is the result of compounding-it earned a return on previous earnings.
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