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I’ve heard of a Mutual Fund, but what is it?
When you’re jumping into the world of investing, you probably hear a bunch of jargon being thrown around. Unfortunately, this makes investing a bit intimidating for the new investor, and scares many people off. One of the terms that you may hear about when getting started on your investing journey is, “Mutual Fund”. What is a mutual fund? Well we’re glad you asked!
Breaking Down a Mutual Fund:
To broadly start, a mutual fund is an investment. An investment that people put their money into with the assumption they will get a positive return. Have you ever looked at a company like Google, Amazon, or Tesla, and thought, “I really want to buy into this company, but I don’t have enough money to buy even a single share”? Well, this is where mutual funds come in handy. Mutual funds are a financial investment that pool together a bunch of investors’ money, in order to buy different financial assets, like stocks, bonds, and other securities. It’s sort of like going out to dinner with your friends and splitting the bill.
“But wait, who is pooling our money together, and what is being bought?” The beauty of mutual funds is that they are run by professional money managers. These money managers have their finger on the pulse of the market, and are backed by a team of professionals. The portfolio manager of the mutual fund will buy into whatever they think best suits the strategy behind the mutual fund. This means you get a professionally managed portfolio, without the hefty analysis. This also allow you to own shares in those companies you were interested in, but couldn’t afford to buy individual shares in.
Another Benefit:
Here’s another benefit to mutual funds, they reduce risk. You know the old saying, “don’t put all your eggs in one basket”, a common mistake for new investors is they tend to put their money into just a handful of companies. This is risky and companies get broadsided by un-suspected detrimental things all the time, lawsuits, viruses, news laws, acts of nature, etc. How mutual funds limit your risk is being well diversified. They spread your money out. Just by being in one mutual fund you may have anywhere from 50 to 100 different companies stocks or bonds in it. This becomes a major reason why retirement accounts are mainly made up of mutual funds because they help people easily diversify. Keep that in mind the next time you are looking over the investment options in your 401(k) or 403(b) through work, you are looking over different types of mutual funds or ETF’s (exchange traded fund).
Want to know what an ETF is? We got another article for you to read.
Cost of a Mutual Fund:
Sounds great, but you may be wondering how these professionally managed mutual funds make money in order to provide these services. While there are costs associated with mutual funds, they still largely make sense to use. So, you have what is called an expense ratio, a fee usually between .5% to 1.5% per year that goes towards paying those money managers. We won’t get too in depth about expenses in this article, however, it is worth noting that like most things in life cheaper is usually better for wallet. None the less, you don’t want to get caught always looking for the cheapest mutual fund, sometimes paying a little more makes a lot sense.
Final Thought:
The great thing about mutual funds is that they come in all sorts of shapes and sizes, meaning there is one out there for everyone! There are mutual funds for all sorts of financial goals, whether that be long term growth, technology focused, dividend income, or just a safe place for your money to retain its value. A new strategy that has come to light recently is responsible investing, these mutual funds focus on companies doing good. So there really is a mutual fund out there for everyone and if you have a work retirement account you are already invested in hopefully a few!
Want to dive deeper in understanding mutual funds? Follow this link to continue your learning. Click Here