What is a Mutual Fund?
A mutual fund is a pool of investors in a “basket” of stocks and bonds. In other words, instead of you investing in one stock or bond, you combine your money with the money of several others to invest in many stocks and bonds. Mutual funds work like stocks in that the money you invest goes into the portfolio, and you receive shares of interest in the fund. There is a professional fund manager who is in charge of investing the fund. Some businesses use mutual funds as an investment medium for their employees’ retirement accounts, but you may also want to consider investing your own personal IRA (Individual Retirement Account) in a mutual fund.
One of the benefits of mutual funds is that because the sum of money is so large, it makes the cost of purchasing and selling stocks much cheaper than you investing alone. It also means that the fund manager can invest in many more stocks and bonds than you can on your own. Another benefit of investing in a mutual fund is that someone else is managing the investments for you. Yes, this is a potential risk, but ideally you would choose a fund company that has a good reputation and track record and will have a manager in charge of the fund who has experience in investing and has been successful at it.
How to Get a Mutual Fund
You can purchase a mutual fund in several ways:
1) Directly through the fund company. Vanguard, PIMCO, and Fidelity are just a few of the many fund companies.
2) From a “supermarket.” This is basically purchasing funds through a third-party company. They are likely to charge you for purchasing funds, so be aware of all of the possible fees before investing with one of these companies.
3) Through a broker or financial planner who is qualified to sell investments. The benefits of going through a broker or a financial planner are that they are professionals who know about the market and the funds, and it is probably the most cost-effective way to go. Brokers will charge you for their services and possibly additional sales charges. Financial planners may do the same, but probably the least expensive thing to do would be to find a financial planner who charges by the hour instead of commission. They can probably find some less expensive, no-load funds for you (which are defined below).
It is important to be aware of load fees. Load fees are what brokers and financial planners charge you in order to make a commission on your investment. They will either charge you at the beginning—front-end load—or at redemption or sale of the fund—back-end load. Funds without loads are called no-load funds. In addition to these stated or understood fees, some brokers will try to tack on 12b-1 fees which is basically an extra but unnecessary expense to your investment. It is perfectly legal for them to charge you these fees, but is also perfectly unnecessary for you to pay the extra fee as the investor, so avoid them if you can. It might not be a stated fee so you may need to ask about it.
Checking out Fund Companies, Brokers, and Funds
It is crucial to do some research before diving in and investing in anything, whether it is a stock, bond, or mutual fund. You want to choose a fund company that has had consistent success in its performance and has a good reputation. The same goes for brokers. It is important to do a broker check beforehand, which you can do at http://brokercheck.finra.org/Search/Search.aspx.
To check out the performance of mutual funds as well as other types of investments, www.morningstar.com is a helpful site. As with any investment, make sure you do your research BEFORE investing your money. You should always know what you are getting into ahead of time.
Peer Counselor I
Powercat Financial Counseling