First of all, props for clicking on this article because "mutual funds"? I mean, I usually run in the opposite direction whenever I see that term. However, today I figured it was time to learn a little bit more about the investment vehicle they call mutual funds and find a way to break it down in layman's terms.
Before doing any research, I asked Bridget from Money After Graduation how she would describe mutual funds in its simplest definition and here is what she said:
"A mutual fund is a collection of investments managed by someone else on your behalf, for a fee."
OK — that seems pretty straightforward and not nearly as scary as I thought it might be, but let's continue.
If you decide to purchase a mutual fund, you will have a money manager operate this form of investment for you. From there, the money manager will invest the funds into a variety of securities in order to produce some sort of financial gain on your behalf.
In other words, if you gave your friend $100 to buy you some makeup from Sephora during a sale you couldn't make, they would purchase the best products possible for you, and also take a portion of that $100 to buy themselves a new shade of lipstick. It's only fair.
Why would I want one?
A mutual fund is great for someone who doesn't have a large amount of money to invest, but who wants to hold a diverse portfolio.
Each mutual fund unit or share can be purchased or redeemed based on the net asset value per share. What's a net asset value, you ask? It's the value of assets minus the value of liabilities. What I'm trying to say here is that it's easy to buy or sell a mutual fund.
Another great thing about mutual funds: for those of us who don't fully know the ins and outs of the stock market, it's sometimes nice to have a professional manage our money.
What are the fees like?
Much like anything that is professionally managed on your behalf, mutual funds do come with fees (known as an expense ratio) and they can be expensive. These are basically just administration or management fees, but can also be assessed based on their "loads".
A front-end load means that you will know what your fees will be at time of initial purchase.
A back-end load means that these fees will be assessed upon an investor selling their shares.
You may also be offered a no-load mutual fund through an investment company. These funds will be sold to you without commission or sales charges. Always do your research before choosing or signing for any financial products or investments.
Are you still with me? Because I swear we're almost done, and you'll be the go-to mutual fund expert in your friend group.
Summarizing what we know
Mutual funds are a great investment option for those of us who are new to the stock market, looking to get our toes wet, and don't have a ton of money to throw into reserves.
You can look at a mutual fund as a basket holding a variety of stock options and bonds that are managed by a professional on your behalf.
Lastly, although it would be nice to have a professional take control of when to buy, when to sell, what to buy, and basically everything stock market, that means that there will be a cost associated. Keep in mind that when you purchase a mutual fund, you will also be held accountable for these additional fees.
That's it! Mutual funds are pretty straightforward once you break down the financial jargon and start to do your own research. Hopefully you feel confident enough to make a decision based on what is best for your financial goals and plans. If not, it's best to consult a professional in the industry. Good luck!