Investing In Mutual Funds

Mutual funds are a common investment vehicle for all classes of people, whether you’re super wealthy or lower middle class.

But, what is a mutual fund?

Specifically, a mutual fund is a type of investment product that pools money from a large group of investors and then invests the funds in stocks, bonds, money-market instruments, other securities, or even cash.

The fund manager’s objective is to create profit for the fund and all of its investors—big and small. And a mutual fund’s goal is to return more profit than a standard market fund, like the S&P 500 or Dow Jones, for example.

One appealing aspect of a mutual fund is investors gain access to professional investors and diversification strategies, at a relatively small cost. Meaning you can leave your investment in the hands off someone who studies the market daily, instead of trying to do your best investing with your limited knowledge and intel.


Characteristics of mutual funds

  • Shares in the mutual fund are purchased from the fund itself, or through a broker. Shares cannot be purchased from other investors on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market.
  • NAV (net asset value) – price that investors pay for mutual fund shares plus any fees that the fund may charge at purchase, such as sales charges, also known as sales loads.
  • Mutual fund shares are redeemable. When fund shareholders want to sell their shares, they can sell them back to the fund, or to a broker acting for the fund. Shares are sold back at their current NAV per share, minus any fees the fund may charge, such as deferred sales loads or redemption fees.
  • Shares are generally sold on a continuous basis. In some cases, funds will stop selling when, for example, they reach a certain level of assets under management.
  • Investment portfolios of mutual funds typically are managed by separate entities known as investment advisers that are registered with the SEC.
  • Mutual funds themselves are also registered with the SEC and subject to SEC regulation.

Types of mutual funds

  • Index funds
  • Stock funds
  • Bond funds
  • Money market funds

Each type of fund may have a different investment objective and strategy and a different portfolio. Different types of mutual funds may also be subject to different fees, expenses, risks and volatility.

Understanding the risks involved with investing and your own tolerance for risk—as well as your desire to involve yourself in the management of your investments—is key to helping you choose the fund or funds that best meet your investing needs.

And being self aware of your present financial state and goals on the horizon also need to play a part in your decision. For example, a millennial or young married couple should invest differently than someone who is a few years out from going into retirement.

Each individual, or family, will have different needs and desires as they age. For most people, this means taking more risk with their investments when they’re young and taking less risk as they get closer to retirement and can’t afford a big setback.


Domestic stock funds:

Offer exposure to the world’s largest, most liquid equity market, and can give investors the ability to own stocks in some of the world’s most successful companies.


International & global stock funds:

These funds can be an important part of a diversified portfolio.
Like all mutual funds, international and global stock funds can potentially invest in a large number of securities, giving you a cost-effective way to own shares in many different companies across the world.


Funds of hedge funds:

These are investment companies that invest in hedge funds. Some funds, but not all, are registered with the SEC and file semi-annual reports. Often, they have lower minimum investment requirements than unregistered hedge funds. This allows them to sell their shares to a larger number of investors. Like hedge funds, funds of hedge funds are not mutual funds. Funds of hedge fund differ from open-end mutual funds because the offer very limited rights of redemption. Unlike ETFs, their shares are not typically listed on an exchange.

FUND MANAGEMENT:

A mutual fund is a professionally managed investment fund. While there is no legal definition of the term “mutual fund”, it is most commonly applied to open-end investment companies, which are collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as “investment companies” or “registered investment companies”.
Hedge funds are quite different than mutual funds, primarily because they cannot be sold to the general public. Mutual funds must be registered with the U.S. Securities and Exchange Commission which is overseen by a board of directors or board of trustees, and managed by a Registered Investment Advisor. Mutual funds are subject to extensive regulations and standards set forth in the Investment Company Act of 1940. Mutual funds are not taxed on their income and profits if they are in compliance with certain requirements under the U.S. Internal Revenue Code.


Mutual Fund Fees

When buying mutual fund shares, investors have to pay an expense ratio, more commonly known as a fee. The expense ratio makes up advisory fees, management fees, and sometimes administrative costs. That’s the price you have to pay for someone else to invest your money, when you’re not managing your stocks on your own.

And, of course, fees reduce returns on fund investments because they’re taken from the investor regardless of the mutual fund’s performance.

So the expense ratio is an important factor that investors should consider before picking a mutual fund. If two funds have similar stocks and positions, but one has a higher expense ratio, the fund with lower fees is often the best option. Put simply, lower fees can often mean there’s more profits left over for the investor.

Either way, an investor’s goal is that the mutual fund performs significantly higher than the fees it takes to manage it.