What the Heck Is a Mutual Fund?

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This is the Mutual Fund factory, where all the world’s mutual funds are produced. Fund elves wrap stardust, lemondrops and a nickel in a unicorn bladder, which is then delivered via dragon-sled to brokerage firms, who sell them to customers. The customer buries the mutual fund in their backyard, and after 30 or 40 years, a money tree starts blossoming, just in time for retirement. Babe, that’s not remotely true. I know, but we have to get people excited about mutual funds somehow. They’re an important option in saving for retirement and most people don’t even know what they are! Even people who own them… like in their 401(k)s! Wait… 401(k)s are mutual funds? No, not exactly. Let’s start at the beginning. A mutual fund is kinda like... a bowl of investment stew. Thousands--or even millions--of investors pool their money to buy a variety of investments (primarily stocks, bonds and currencies) which are blended together and then divided amongst the participants. And just like a restaurant serves a lot of different dishes, mutual funds come in a lot of different flavors… Some funds focus on a specific sector of the economy, like Technology, Retail or Agriculture. Others focus on specific areas of the world - “Emerging Markets” refers to developing nations. And some focus on the size of the companies - from Large-Cap to Micro-Cap. And they can get a lot more customized than that: The Pax World Global Women’s Equality Fund invests in companies that advance the cause of gender equality. Or, for something completely different, the Vice Fund focuses on tobacco, alcohol, gaming, and weapons companies. Mutual fund shares are usually inexpensive, and you get the advantage of diversification without having to buy hundreds or thousands of shares yourself. BUT there are costs. Every mutual fund has an upkeep fee called an ANNUAL EXPENSE RATIO, which ranges from around 0.1% to 2% of the value per year. Some funds also charge an extra fee called a LOAD when you buy or sell your shares, usually between 1% and 5.75% of the sale price. You can think of these fees as payment to the chef who whipped up your dinner. Wait… who are these chefs anyway? And how are they deciding what ingredients to use? Well, that depends on whether your mutual fund is ACTIVELY or PASSIVELY managed. Active funds are managed by a team of analysts and traders. They try to out-perform the market by carefully watching economic indicators and picking which investments to hold and which to sell. Kinda like a celebrity chef who’s always improvising and changing her recipes based on what’s trendy or in season. As you can imagine, the fees on actively managed funds tend to be higher. Passive fund managers are more like chefs who stick to the cookbook. Their goal is to match benchmarks, not beat them. For example, an “S&P 500 Index Fund” tries to mirror the modest but steady growth seen in the index of 500 of the biggest companies. Passive funds are popular among investors who believe it’s a losing game to try to “beat the market.” Because there’s less analysis and fewer trades, passive funds are cheaper to own. Mutual funds are an amazing creation. They allow ordinary people to invest like huge institutions--thousands of holdings, diversification--while being easy to use and letting you express your personal tastes and principles. But where do you start? If you don’t have any mutual fund investments yet, you might begin by opening an investment account with a mutual fund company. Their advisors will help you choose funds that are a good fit for your situation. Investors who are a bit savvier and want a more modern approach are starting to use “Robo-Advisors” to invest in mutual funds. Basically, you answer a few questions online and the service automatically constructs a personalized portfolio of funds for you and handles all the trades and holdings. Plus their investment minimums are pretty low, sometimes just $100! And if you’re invested in a 401(k) plan through your work, you already own mutual funds! And you’re paying fees for an advisor, so don’t be afraid to contact them and find out which funds you own and what your options are. I remember the first time I went to a sushi restaurant. I didn’t recognize a lot of the ingredients on the menu, and it was a little intimidating. But it didn’t take me long to learn what I liked and I’m so glad I did. Like sushi, mutual funds may not be for everyone. But everyone should be planning for retirement, and mutual funds are popular with investors of every level for good reason. And that’s our two cents!
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Channel: Two Cents
Views: 309,242
Rating: 4.9378095 out of 5
Keywords: pbsds, pbs digital studios, two cents pbs, 2 cents pbs, two cents, mutual funds, etf, index fund, actively managed fund, passive funds, long term investing, day trading, 401k, diversification, socially responsible investing, sri, vice fund, mutual fund loads, low cost mutual fund
Id: jxZa90pSYzc
Channel Id: undefined
Length: 4min 56sec (296 seconds)
Published: Wed Feb 27 2019
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