What Should You Know About Mutual Funds?
Get Ahead by LinkedIn News
We talk about leveling up, about geting ahead in your career and about excelling where you are right now.
Mutual funds are a pool of money from investors that a money manager strategically invests. These investments include assets like stocks, bonds, and money market instruments. Each type of mutual fund has a different goal, so invest in the fund that aligns with your objectives.
By Lora Korpar
First-time investing can be overwhelming. This is why options exist to help ease you into it. One of the most popular options is investing in mutual funds.
A mutual fund is a pool of money from various investors that purchases financial assets like stocks, bonds, real estate, and more. This investment strategy requires active oversight, so a money manager operates the fund.
“It’s a company where you invest your capital… alongside other investors, and putting together those sums of money, they reach a substantial amount, so they can buy shares of Amazon, Apple, Tesla, etc.,” said Gustavo Cano, founder and CEO of wealth management platform Fund@mental. “So it gives you the ability to buy not only one share of a company but rather a percentage of those companies that are publicly trading. And that, therefore, allows you to diversify and invest in a broader amount of corporations.”
The money manager decides which assets to buy and when to sell them, then gives you the income it generates depending on the amount you originally invested. In return, you pay a service fee.
“Many people hear ‘mutual funds’ and they make an assumption based on what they've heard, either thinking it's very risky or it's very boring and conservative,” said Eli Fried, CEO of Leatherback Investments. “In reality, the mutual fund can be virtually anything. There are thousands of mutual funds managed by hundreds of different investment managers. And it's very important for people to understand that each mutual fund has a different objective.”
What Are the Types of Mutual Funds?
Many mutual funds are available, each with different strategies and goals. Fund objectives often fall into three categories: safety, stable income, or value growth. Here are some of the main fund types, according to Cano, Fried, the U.S. Securities and Exchange Commission, Investopedia, and NerdWallet.
“There are dozens and dozens of subcategories — stocks in different countries, stocks of different sizes, bonds of different types of companies… so it's important for an investor to at least get a basic understanding of what the fund objective is,” Fried said.
Your financial goals and risk tolerance will determine which type is best. Cano recommends hiring a financial advisor to help decide. If you don’t want to spend money on one, do extensive research before investing.
“If you are a young person with a lot of time ahead of you, you should probably be more biased toward equity and buy any mutual fund you think can provide that outcome,” Cano said. “However, if you are an elderly person or close to retirement, maybe you want to have most of your assets in a money market or in a fixed-income fund, assuming — which is a big if these days — that they're going be less volatile and therefore will give you the ability to preserve the capital that you may need for retirement.”
Pros and Cons of Mutual Funds
Mutual funds take a lot of the work out of investing. The money manager makes decisions for you regarding which companies to invest in. They also take care of the necessary paperwork.
“It also allows you the ability to access more of a variety of assets,” Cano said. “If you only have your own capital and it's not big, then maybe you won't be able to have more than two or three stocks or bonds… Now when you get into a mutual fund with your $1,000 or $500, that gives you a very low percentage upfront, but it gives you access to whatever the fund owns in your respective percentage. And I think that's a huge advantage.”
Recommended by LinkedIn
However, mutual funds cost more than just the money you invest. Money managers charge a fee for their services. This fee is often between 0.5% and 1.5%, which can accumulate over several years or decades.
“In addition, some people want to pick their investments,” Fried said. “They love a certain company and they want to have all their money in some of those companies. So you're giving up some control by investing in a mutual fund.”
Mutual Fund Advice for First-Time Investors
Fried said his two tips for first-time mutual fund investors are to keep investments simple and cost-effective.
“[Investors] should try to identify one to three solid mutual funds. And if you pick the right balance, you really can design a perfect portfolio,” Fried said. “It's like any other thing you can buy. You can buy a shirt that is not necessarily a better shirt and pay triple the price just because you bought the wrong brand in the wrong store. So you have to educate [yourself] and identify the mutual fund companies that are devoted to giving a great product at a great price.”
“The best advice that I can give is to read every day,” Cano added. “Read the papers, and there are tons of services in the market that give you access to information regarding what the state of the economy is, not only in the U.S. but global markets… Even if you hire a professional financial advisor to guide you through the investment process, I think having knowledge on the situation and reading every day about it is invaluable.”
Research the mutual fund to ensure you are familiar with its objective. It is easier to choose the best one for you once you know which objective best aligns with your financial goals.
“If you're looking for a long-term investment, then growth is probably your main objective. You want to make sure that your money can grow well over time,” Fried said. “If you have a very short-term need, then you really have to make sure to protect it because stocks can be very volatile in the short run. So I would say those are the key issues.”
Cano and Fried also recommend beginner investors find an index fund to invest in. These funds try to mimic the performance of a particular index, like the S&P 500 or Nasdaq Composite.
“That is called a passive strategy,” Cano said. “And if you don't know what you're doing, maybe that's the best approach. But everything has a good side and a bad side. If you invest in a passive strategy in the market times 20%, you almost guarantee that you're going to also lose 20%. If it goes up 15%, 20%, 25%, then you will go up accordingly. So the most important thing is to understand what you own and why you own it.”
Overall, formulating a long-term plan and sticking to it is critical to your success.
“It’s important to keep a long-term perspective and not to get too swayed by the headlines,” Fried said. “The financial news likes to dramatize the short-term, but most mutual fund products work best when people select a good group of them, and then they pretty much leave it alone for a long time.”
Top Takeaways
What Are Mutual Funds?