KristiLyn Wilkinson, M.S., AFC Candidate
Let’s talk about mutual funds! They are pretty important for the average investor to understand. You might not know that you are invested in a mutual fund, but if you have any sort of work 401k or retirement plan, the odds are very likely that the underlying investment is a mutual fund. If you don’t have a retirement plan right now, the odds are very likely that you will have one at some time in the future, so let’s make sure you know how they work!
A mutual fund is essentially a pool of investments. I like to think of a mutual fund as a cookie jar, or a holding container for different investments. Your cookie jar can contain a variety of investments such as stocks, bonds, real estate, money market instruments, Oreos, chocolate chip cookies, etc. One mutual fund may be invested in hundreds of different stocks. If you have $100 to invest in stocks each month, that would buy you about one share of apple stock. If you invest that $100 in a mutual fund instead, that $100 buys you a tiny piece of all the stocks in the mutual funds. Mutual funds are a great way to achieve diversification, and diversification helps lower financial risk.
Mutual funds have different investment objectives, so you want to pick a mutual fund that aligns with YOUR goals and objectives. Some mutual funds seek long-term growth, others focus on paying out income, some are a mix of stocks and bonds and their allocation adjusts over time as you near retirement. Other funds might be aggressively invested and are seeking to make above market returns, while others still might be invested in international stocks, and some may track a specific market index.
After you have decided which type of fund matches your investment objectives, you want to compare the different funds. If you are selecting a mutual fund through your employer, they likely will give you a handful of mutual funds to choose from. If you are selecting a mutual fund on your own for your individual retirement account (IRA) you could be choosing from thousands of mutual funds. All mutual funds have a prospectus, a document that outlines the fund objectives, what it is invested in, and the fees and costs associated with that fund.
You want to look for a “No-Load” mutual fund. Load mutual funds charge a commission, and commissions and high fees eat away at your returns. You can’t control the return you will make on any one investment, but you can control how much you pay in fees by selecting low-fee funds. A mutual fund expense ratio tells you what percentage of your investment is going toward fees. The farther below 1% you can get your expense ratio, the better! Some mutual funds have expense ratios below .10%
Once you have narrowed down your options to a handful of funds, you can compare different mutual funds using the FINRA fund analyzer https://www.finra.org/investors/tools-and-calculators/using-finra-fund-analyzer. You will need to have the ticker symbol for each fund that you want to compare when using this tool. The ticker symbol is an abbreviated name for the mutual fund- usually represented with 3-6 letters.
Now that you know a little bit more about mutual funds, I invite you to look at the mutual funds you might already have and make sure they line up with your goals, objectives, and investment time horizon. Do you know what the underlying investments in your work 401k are invested in? There is no time like the present to make sure you are on track to reach your investment and retirement goals!
For more information about investing and mutual funds, check out https://www.investor.gov/.
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