Mutual Funds 101: What You Need to Know

by | Sep 12, 2023

Investing in the stock market can be overwhelming, especially if you have little or no past experience in financial markets. However, if you are one of these people there are still options for you to participate in the financial markets to start investing for your future and your family’s financial security. Mutual funds can be an excellent option for those looking to invest in the stock market without the need to research individual companies. 

What is a mutual fund?

A mutual fund is a type of investment vehicle that pools money from multiple investors to purchase a diverse portfolio of stocks, bonds, and other assets. The portfolio is managed by a professional fund manager who is responsible for buying and selling securities, based on the fund’s investment objectives. Investors buy shares in the mutual fund with the value of those shares based on the underlying performance of the mutual fund’s portfolio.

There are many types of mutual funds, each with different investment objectives, strategies, and asset classes. Some mutual funds invest only in large-cap stocks, while others focus on bonds or foreign stocks. There are funds that are actively managed, where the fund manager aims to outperform the market, while others are passively managed, and the fund simply tracks an index.

Why invest in a mutual fund?

One of the most significant advantages of investing in mutual funds is diversification. By pooling money from multiple investors, the mutual fund can purchase a variety of securities, reducing the risk of investing in a single company. Additionally, mutual funds offer easy access to professional management, which can be especially valuable for investors who lack the time or expertise to research individual stocks.

Another advantage of investing in mutual funds is liquidity. Mutual fund shares can be bought or sold on any business day, providing investors with easy access to their money. This is in contrast to some investments, such as real estate or private equity, which can be illiquid and challenging to sell.

Mutual funds also offer a level of convenience and flexibility that other investments may not. For example, you can set up automatic investments in a mutual fund, which allows you to invest regularly without having to remember to do so. Additionally, you can typically purchase mutual funds through a brokerage account or directly from the mutual fund company.

How do mutual funds work?

When you invest in a mutual fund, you are buying shares of the fund. The price of those shares, known as the net asset value (NAV), is determined by dividing the total value of the fund’s assets by the number of outstanding shares. As the value of the underlying securities in the portfolio changes, so too will the NAV of the mutual fund.

Mutual funds charge fees for their services, which can include management fees, distribution fees, and other expenses. These fees are typically expressed as an expense ratio, which represents the percentage of the fund’s assets that are used to pay for these fees. It is important to note that mutual fund fees can vary widely, therefore make sure to research and compare funds before investing.

Get professional advice

Ultimately, the decision to invest in mutual funds or any other asset should be weighed carefully. Mutual funds may not be the best option for some with particular financial circumstances and investment goals. A professional financial advisor can look at your situation and help you decide whether or not investing in mutual funds is a good idea for you.