"As for how to buy a fund on a monthly plan, it's as easy as signing your name. All you have to do is fill out a preauthorized checking plan, where the bank debits your savings account a specified amount each month, and a fund-purchase application. They're often on the same form. It won't take you more than a minute.
"Each month, the fund will forward you a summary of your current situation: how much you contributed this month; how many shares that money bought and at what price; your accumulated share position; everything. These statements explain it all. You just stick them in your file and watch the money grow, all the while thinking what a great guy your barber is."
"Do they mail you the shares each month?"
"No. For the sake of convenience, the shares are kept in non-certificate form at the mutual fund company. But if you ever want a share certificate, it's only a letter away."
"What if you want to cash out and get your money?"
"You won't be doing that for a long, long time, will you, Tom?"
"Of course not, Roy. I was just curious."
I cut in. "What about taxes, Roy? Do you pay them each year?"
"You pay tax each year on any dividends that the mutual fund has declared. You see, mutual funds make money in three ways. Most of a growth fund's profit occurs when a fund sells stock for more than it paid for it— in other words, a capital gain. However, a fund also makes money when one of the stocks it owns pays the fund a dividend. Finally, a fund earns interest income from bonds and idle cash. At least once a year the fund declares dividends to distribute the profits from all three of these sources. By the way, it's