It’s a bit like being part of a club

Some clubs and organizations are great. They grant you access to exclusive locations, benefits, and other individuals. By paying a fee, you can become part of a professionally-run club which will make sure that you will be pleased with your experience and will reap the benefits of being part of this kind of society. Similarly, a mutual fund allows for smaller investors and individuals to invest with larger, professional funds, which will make sure that the investments will be handled correctly.

What is a mutual fund?

When you and other investors come together to buy shares of a bunch of bonds, stocks and other kinds of securities, you are taking part in investing in a mutual fund. It’s an investment that you would most likely not be able to do alone, as it requires much financial knowledge, as well as the right management team. For this reason, most mutual funds are run by a portfolio manager, which will make sure that everything is in good order (and will be paid through an annual expense ratio fee). Mutual funds are a good way to make sure that one has a well-managed, diversified portfolio. These funds are also subdivided into different categories, each representing different investment goals.

mutual funds

Price, please?

The price of a mutual fund actually has a name: the NAV, or net asset value. Once again, in a little math flashback, one divides the value of all the portfolio, by the number of the fund’s outstanding shares. This, unlike the ETF which can be calculated and sold throughout the day, happens once a day at the end of the business day. This makes sense, as a mutual fund can hold hundreds of securities with ever-changing values. The returns of a mutual fund also vary, as they can be either dividends on stocks, capital gain distribution (that’s when the securities’ original value has increased), or through selling the fund’s shares for a profitable return in the stock market.

One, two, step

If there’s one thing you should remember about mutual funds, is that an investor of a fund actually doesn’t own the securities in which the fund is investing. They do own the shares of that particular fund, which means they really trust the fund in their investment decisions (after all, isn't that what financial experts are for?). So when one has a share in a mutual fund, they only acquire monetary return rights, not voting rights, such as when purchasing stocks. When mutual funds are actively managed, trading decisions fall on the portfolio manager, and the rest of their team. They base these decisions on the benchmarks we discussed, which are the indexes that a fund is ideally trying to outperform. Or at least, that’s the general goal.  

Why will your future self thank you

Because mutual funds open a world of possibilities. They allow investors to invest with a professional fund, which will (hopefully) make the best decisions in terms of selling and purchasing securities. These kinds of funds are also cost-effective, as they allow for investors to start buying shares without a large initial sum.

Extra bits:

  1. A dollar is a “buck” because back in the days of the Frontiers, the fur of a buck (a kind of deer) was worth one dollar.

2. “There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know where the market is headed” - Dr. William Bernstein.

3. The NYSE and Nasdaq stock markets are open from 9:30 a.m. to 4:00 p.m. Eastern Time. But don’t think that means traders go home...