Mutual Funds - The Basics

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Mutual funds are investments that pool together the money of thousands of small investors and invest this money in stocks, bonds and/or other securities. Instead of purchasing a particular stock, you purchase shares in a whole group of stocks.

A Fund Manager decides where to invest the money based on the goal of the fund. Basically, there are three goals: to provide you with income while your money is invested - called "Income Funds;" to make money when you sell your shares - called "Growth Funds;" and a combination of the two - called "Growth and Income" or "Balanced" or "Blended" Funds.

Many people invest in mutual funds through their employer's retirement plans (401(k), 403(b) plans, etc.) Employers will usually offer a given set of mutual funds to choose from. Investing in an IRA is another common way to invest in mutual funds.

 

The Upside of Mutual Funds

  • They offer small investors access to the advantages of diversification, investing in hundreds or thousands of different companies.
  • Because mutual funds are generally diversified, spreading the risk with different companies and different securities, you do not have to monitor specific stocks or other investments.
  • Individual stocks and bonds are risky; their value is subject to volatile investor perceptions. When you choose single stocks, you are betting on individual companies. 
  • Stock and bond mutual funds are not guaranteed  you can still lose money  but diversification minimizes some of the risk.
  • Growth is proportionate. That is, as the fund is successful, so is your account.

 

The Downside of Mutual Funds

There are hundreds of mutual funds available. You need to select wisely to avoid risking all or part of your investment and to avoid excessive fees.

 

What do I Need to Know about Mutual Fund Fees?

All mutual funds charge you some fees to cover on-going expenses, but the amount of the fees varies among funds. These expenses will cut into the amount of money that you make from the fund.

  • Some mutual funds charge a commission called a "load." These funds charge a fee each time you buy or sell shares in the fund. "No load" funds are your best bet.
  • Despite what anyone might tell you, funds with lower expenses generally perform just as well as funds with higher ones. Stick with low-expense funds. Read WISER's fact sheet, Mutual Fund Fees & Expenses, to learn more about mutual fund fees.

 

 

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