*Disclaimer: Any Information found on website is for education purposes and is not tailored to the investment needs of any specific investor. Investing involves risk, including risk of loss. 

If this is the first time you hear the phrase mutual funds and your wondering what it is. Don’t worry we will break it down as simple as possible. 

With the assistance of an investment professional, a mutual funds could be a vehicle that can help you invest for retirement. In this article we will be going over what mutual funds are, how they work, costs of mutual fund, and risk involved. 

What is a Mutual Fund? 

A mutual (open-end) fund is a professionally managed investment portfolio that allows investors to put money together for that particular fund. 

A mutual fund offers guaranteed marketability which allows the investor to directly sell their portion of shares back to the mutual fund. Mutual funds, are known as redeemable securities (Don’t need to sell on your own in the secondary market). 

Each investor in the mutual fund’s portfolio owns a piece of the portfolio. All investors are mutual participants and no one has privilege over any other investor. Each investor shares mutually in gains and distributions from mutual fund. 

The performance of the investor in the fund is based on the number of shares owned. Mutual fund shares can be purchased in either full or fractional shares. 

A mutual fund portfolio is elastic. This simply means that money is being invested in the fund, purchased or redeemed. For this reason mutual fund portfolio value and holdings fluctuate as the value of the stocks/bonds/securities rise and fall. 

Characteristics of mutual funds: 

  • An investment advisor manages the portfolio for investors 
  • Mutual funds provide diversification by investing in different companies or securities 
  • Some funds allow $500 or less initial investments and monthly contributions for little as $25 per month
  • Investment company may reduce sales charge based on the amount of investments 
  • Tax liabilities are simplified each year, fund distributes a Form 1099 which explains taxability of distributions
  • A mutual fund has a particular investment goal. Which could be: 
    • Growth and Income 
    • Growth
    • Aggressive Growth
    • International 

*its important to know the investment goal you are getting, risks are involved. Its the job of the investment professional to inform you of the risks to ensure it matches your investment goals. 

How Do I Buy a Mutual fund? 

There are two main ways, that you can buy mutual funds. The first route is through your employer who may offer a 401k (learn how it works). The second route if you don’t have a 401k or maxed out your employer’s match you can use an IRA (learn how it works) with the help of an investment professional. 

A good starting point is 10% to 15% of your income for retirement. It will be important to stick to your monthly contribution to reach your long term goal for retirement. 

What Costs come with a mutual fund? 

There are fees added when you purchase mutual funds. Mutual funds pass along there costs to investors through investment fees and other expenses – such as operating expenses, fund portfolio management fee, 12b-1 asset based fee, front-end load, back-end load fees, redemption fees, exchange fees and account fees (SEC Source). 

Fees are expected when it comes to investing, so you must pick a mutual fund that performs well and has reasonable fees. This is where the investment professional comes into play to ensure you understand the fees and performance of the fund you are picking from a list of funds. 

How much risk is involved with investing in mutual funds? 

There will always some level of risk when you are investing. For this reason its the job of the investment professional to teach you how investments work so he can recommend a fund that matches your investment objective and level of risk. 

The riskier the investment the higher the reward or the bigger the loss. This is what you need to understand and comfortability with risk.