What You Should Know About Mutual Funds

There are so many different things out there that you can invest in. One of them is a mutual fund. In this video we go over everything you need to know about mutual funds.

A mutual fund is a professionally managed investment where investors money is put in bonds, stocks, money markets, and other assets. Their goal to make you the most money possible, with the least risk. They allow small investors to be able to invest more than they would by putting all their money into a few diversified investments. Mutual funds have many different assets. You own a small part of the asset instead of the whole thing. Mutual funds are also less risky because if a single investment goes down, there are others that make the loss minimal.

There are many different types of mutual funds. These are the main types:
Equity fund: An equity fund is mostly invested in stocks. Some are invested in groups of similar sized companies' stock. The smaller stocks are riskier while the larger stocks are more secure. These funds have different categories based on what the goal of the particular fund is.
Index fund: Index funds try to beat the market. Managers buy stocks depending what S&P 500 and Dow Jones is doing. This makes them cheaper to run, therefore making you more money.
Fixed-income fund: Invests in government and corporate bonds, and other debts with a set return rate. The fund collects interest which is spread to its shareholders. They also usually buy undervalued bonds and sell them at profit. You have to choose wisely when buying fixed-income; some funds are better than others.
Balanced funds: Invests in different types of investments to reduce risk and make things balanced. These usually do what the investors want.
Money market funds: These aren’t the money market accounts you can get at your bank, but they are both similar. Money market funds are secure, low-yield funds invested mostly in government and corporate bonds. Money market accounts let you invest into your bank and they pay interest for allowing them to use it.

There are a few different ways you make money with mutual funds. The first is when the mutual fund company receives a dividend from its stocks, you get a portion of it. You can be paid with a check or have your earning reinvested. The second way you’ll make money is when the fund company sells a stock, you get a portion of profits. The third way is when the funds share prices increase, you sell your share for profit. Most of the money you put into your retirement account goes into a mutual fund. This money is tax-free, your employer may have a matching program giving you free money, and it is an automatic investment too.

To pick the right mutual fund, look at the funds history and ensure it is trending upward. Compare it to similar funds. Comparing it to the S&P 500 is a good way to do this because many funds try to match it. Make sure the fund is diversified.

Usually, 1-3% of the money you invest is used to pay for people involved in running the fund. Some funds have no fees, but all funds have different fee requirements.

Very few people are actually needed to manage and run a mutual fund. Often mutual funds are a small part of a larger investment company like VanGuard and Fidelity, among others. They each have many different funds that you can choose from.

Advantages of mutual funds is that they are diversified. This produces better returns and are very safe investments. They are easy to invest in because instead of saving to buy one expensive stock, you could buy multiple stocks cheaper with a mutual fund. Plus mutual funds are rather liquid, so you can easily get your money back. They are cheaper because the cost of buying a single security costs much more with fees than it would to get multiple securities with a mutual fund. Your investment gets professional management. You don’t have to manage your own portfolio because you have a professional do it for you with a mutual fund. You can also choose a manager that invests in a way that you like.

Disadvantages of mutual funds include changing returns. You may not always make what you expect to and there is no federal insurance. You have to wait to invest because people are constantly investing and withdrawing their money, so mutual fund companies have to keep a lot of cash on hand causing it to be a while before your money is actually invested. With a mutual fund, you have to pay for a manager. This can cost a bit, especially if your investment is not making money. You risk having a bad investment due to managers sometimes not diversifying the best, so you could lose money if the market drops.

If you watched my 2020 goals video, you would know that I want to invest in an index fund. I would likely do this through Fidelity or VanGuard, depending which one has less fees. They are the safest and easiest investment with good growth. Now, with the markets being low, would be a good time to invest since we know it will go up eventually.