Mutual funds are, by definition, diversified…meaning they’re made up a lot of different investments. That tends to lower the investor’s risk. They do, however, have both advantages and disadvantages when compared to investing directly in individual securities. They play a pretty important role in household finances (especially retirement planning).
Mutual Funds Definition
A mutual fund is a type of investment where a money manager takes your cash and invests it as he sees fit, usually following some rough guidelines. For example, the Fidelity Group has a fund that specializes in finding high dividend paying stocks, one that specializes in bank stocks, and one that specializes in European stocks, etc.
You simply find a fund that matches your objective, you review its past performance and its management team, and then you write a check to that mutual fund.
A mutual fund is a professionally managed investment vehicle that pools money from many investors to purchase securities (stocks, bonds, money market instruments etc.). A money manager then decides how the funds are invested so you don’t have to – but you pay for it. A mutual fund’s management and operational fees, known as the management expense ration (MER), are deducted from the return on your investment.
While it is tempting to think that a mutual fund is a hedge fund…it’s also incorrect. Mutual funds aren’t hedge funds because mutual funds can be sold to the general public - unlike hedge funds.
Different Kinds of Mutual Funds
There are many kinds of mutual funds:
Specialty funds that focus on particular market sector (energy, health, etc.)
Index funds (which track a market index like the S&P 500)
Real estate funds
Make sure to read the simplified prospectus before investing in any mutual fund. It’s super important to be aware of where your money is going, and how and when you can access it. Selecting mutual funds and money managers is an important and often overwhelming experience – we know. We’ve got you covered. Our “Putting Your Money in the Market” course will teach you everything you need to know about getting started with mutual funds and ETFs.