INVESTING

A Breakdown of Mutual Funds

What are mutual funds and how do they work?

According to Investor.gov, a mutual fund is a company that pools money from many investors and invests the money into securities such as stocks, bonds, and other assets. These collections of stocks and bonds are known as a portfolio. People looking to invest in mutual funds buy shares, and each share represents a percentage of ownership in the fund and the income that it generates.

Risk: Low

Mutual funds are an easy way to invest allowing a multitude of features, including management by fund managers. Fund managers do a majority of the heavy lifting. They research the stocks and securities and using their judgement select the best ones. When looking into potential mutual fund investing, it is important to consider who the fund manager is and the decisions they are making. Mutual fund managers can be found in a mutual fund prospectus which details the investment objectives and strategies of the manger.  Fund managers can either be very conservative or aggressive in their investing style. Legally, the fund manager must operate for the best interest of the mutual fund shareholders and adhere to ethical standards.

This type of investment makes it very easy to diversify your portfolio. Mutual funds tend to have a range of different companies and industries that they are investing in. This allows for a lower risk, if one of the companies were to fail making it a unique and potentially great way to invest.

Due to their affordability, many mutual funds offer an entry investment at a lower dollar amount and additional buy in is usually affordable as well. Another benefit of mutual funds is that they are liquid, meaning you can easily take your money out at any time. Still, make sure to check into any fees associated with withdrawals before taking your money out.

Unlike Exchange Traded Funds (ETFs), mutual funds are only traded once a day after the market closes at 4 p.m. ET.  Since the funds are managed, you don’t have to worry about making the right move while still benefiting from this passive, hands-off form of investing.

Types of Mutual Funds:

Money Market Funds

• This fund is built on slow and steady growth, investing in stable large cap businesses that slowly grow or decline compared to small-cap companies.

Bond Funds

• This type of fund can have a higher risk as they aim to have a higher return than money market funds. Bond funds are made up of government and corporate bonds that mature over different time periods including short-term, intermediate, and long-term. Different types of bonds make up this fund which leads to different types of risks and rewards depending on the bonds in the fund.

Stock Funds

• Investing in a pool of different company stocks that can be made up of growth funds, index funds, income funds, or sector funds. This is generally a safer form of investing in the stock market by buying multiple shares within a single fund.

Target Date Funds

• A mix of different investments that are designed for people with a specific retirement date in mind. This is a low-risk investment designed to help you reach a retirement goal without making any investment decisions. An example of this would be a 401k.

There are a variety of ways to invest in mutual funds, including using an investing app on your phone. Mutual funds can be a great way to diversify your investments with the added benefit of having a fund manager, making it a potentially less stressful way to invest. When investing in mutual funds, be sure to consider all your options and do your research.

Sources: 

• https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1#:~:text=any%20redemption%20fees.-,What%20types%20of%20mutual%20funds%20are%20there%3F,features%2C%20risks%2C%20and%20rewards.
• https://www.ramseysolutions.com/retirement/how-to-invest-in-mutual-funds