What is a mutual fund? A mutual fund, by definition, is where a group of brokers/managers hand-selects a ‘package’ of stocks to sell together. These can vary depending on the group making them up. The brokers and managers are professionals, so they take time and invest their own money into these same stocks as well. Sometimes, you can get a mutual fund with something like a contract for difference to make a better investment.
Why is this more advantageous? Mutual funds are a great way for beginning investors to get involved. They are low cost; some mutual funds are sold for under $100. The time efficiency is another distinct advantage to investing in mutual funds. Instead of having to sit around for hours reading and following your stocks, you have someone else that is following the market for you. On the flip side, you know what stocks you have because the company that is managing your mutual fund keeps you involved in the process. Your flexibility in your involvement is up to you; if you want to follow those stocks as well, you can, and you can learn how your brokers make their decisions and why.
Are there extra fees involved? There are, and it’s up to you as the investor as to whether or not the fees are worth the investment that you will be making. There are several types of fees that may or may not be involved when investing in mutual funds. The following fees come out of the initial investment.
– Sales charges and Purchasing fees: “front-end loads” that an investor pays when they first buy the share. The cost is off the initial investment. Sales charges go to the manager, and purchasing fees go to the fund to decrease initial costs for the company investing in the mutual funds for you.
– Deferred sales charges and Redemption Fees: “back-end loads” that an investor pays when they sell or redeem shares. Like above, the sales charges are for the broker, and the redemption fee is for decreasing costs.
– Exchange fees and account fees: These are maintenance costs, the exchange fee is for when the investor chooses to switch money to another fund in the same group of funds, the account fees are any other fees that are for maintenance (like if your account is less than a certain dollar amount).
– Management fees: Fees that are paid to the broker for individual portfolio management and administrative fees.
– Distribution/service fees (also called 12B-1 fees): Basically, this helps the company you’re investing through get the word out so more people will invest with them.
– Others: Building upkeep, legal and accounting expenses, and whatever else isn’t mentioned above. Think about this as what the company uses to stay open.
How do I get one? So, after all of this, you’ve decided to invest a little money into mutual funds. You can go to your financial institution or a financial advisor and discuss the possibility of investing in a mutual fund.