Funds and profits

QHow do mutual funds work, exactly?

AQA— G. S., Madison, Alabama

In a nutshell, a mutual fund receives money from many investors and then professional managers choose how to invest it, for a fee. Mutual funds are a great solution for those of us who don’t have the time, skill or interest to study the universe of investments and make “buy” and “sell” decisions repeatedly over long periods.

Mutual funds come in a wide variety, with some focused solely on one kind of asset, such as stocks or bonds, and some investing across several asset classes. Within the stock-fund world, funds might focus on large, medium or small companies; dividend-paying companies; fast-growing companies; or undervalued companies. Some specialize in particular industries, such as energy, health care or financial services; or regions, such as Europe, Latin America or Asia.

Fees vary widely by fund, and it’s well worth minimizing the fees you pay so you can maximize the growth of your money. One way is to stick with lowfee, broad-market index funds, such as those that track the S&P 500 index, or the entire U.S. or world stock markets. Those tend to have ultra-low fees, are easy to get in or out of, pay dividends and often outperform more actively managed funds with higher fees.

Learn more about mutual funds at Fool.com/ investing/how-to-invest and research individual funds at Morningstar. com/funds.

Can you explain what “profit-taking” is?

— C. N., Tea, South Dakota

It’s a fancy way of referring to selling investments for a gain. If many investors are selling out of a stock after it has run up a lot, the selling will depress the stock a bit, and you might hear that the share price is down due to profit-taking.

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