What are Mutual Funds?

Ah, the last of this week's five part series: Mutual Funds.

There is no question that you haven't heard of Mutual Funds. Many advisors, banks, financial institutions, and more have access to some of the world's best mutual funds. But I bet you they all will tell you to buy buy buy! But not why why why.

Yes, here at Aryandale Financial, we do offer Mutual Funds as well. However, I have no interest in telling you to buy buy buy. My interest is to teach teach teach, and in turn, when you are ready, you will take charge of your financial future and have an idea of WHAT you want to buy buy buy.

Our advisors provide ADVICE and ACCESS to the best products. We help you build a financial foundation with knowledge and guidance: you call the shots, and we help you make it happen.

With that being said, whether it's individual stocks, bonds, REITs, low cost ETFs or low cost mutual funds, you now have the basic understanding of what each product can do and a bit of how they work. This was the point of the 5 part series: to educate, on a basic level, what is available to you out there for investments.

With that said, let's wrap up this series with Mutual Funds!

What are Mutual Funds?

Mutual Funds are an investment fund that a group of investors pool their money into, allowing a professional money manager to invest and monitor a portfolio of stocks, bonds, REITs, currency and other investments on their behalf.

What's so special about Mutual Funds?​

What's nice about mutual funds is the fact that like-minded investors can put their hard earned funds together under professional management with proven track records for consistent returns to have stronger purchasing power in the market.

Aren't Mutual Funds expensive?

Depends on what and who you are investing with.

​Yes, there are management fees associated with Mutual Funds. But that is truly the cost of having active management of a portfolio by a professional money manager. Mutual Funds range in fees, but on a basic level, they charge a percentage of assets under management from 1% to 3%, on average.

These fees are worth it when you see double digit returns. However, nothing is guaranteed.

Why should I bother with Mutual Funds then?

Whether you have a few hundred or hundreds of thousands, Mutual Funds allow the smallest to the largest investors participate in the markets.

​Now, I want to specifically highlight the advantages of using a Mutual Fund for someone starting out in their investment journey.

Investing in a mutual fund is a low cost way to start investing. When you have only a few hundred to start with, there aren't many stocks, bonds or REITs worth buying individually. Why? Commission costs.

​Take this example:

You've turned 18 years old and have saved up $500 of your hard earned money. You want to start investing.

Do you:

​a) Buy 3 shares of Apple Stock at $163, with a $10 commission? ($489 of AAPL, $1 cash left after paying commission)

b) Buy no bonds because you need a minimum of $5,000 to purchase one bond? (Most brokerages have these minimum purchase rules)

c) Buy 2 shares of the S&P 500 SPY ETF at $245, with a $10 commission? ($490 of SPY, $0 cash left after paying commission)

d) Buy 35.714 units of the TD Balanced Growth Fund (holds stock, bonds and REITs) at $14, with $0 commission? ($500 exact of TD Balance Growth Mutual Fund and $0 cash left)

$10 may not seem like a lot, but that is 2% of your $500. That is a lot to pay for commission. Historically, markets return 6-7% per year. To pay 2% before any growth has started is a big shot to your investment's potential.
 
Mutual Funds allow smaller investors to participate in an efficient way. No longer will there be cash sitting in your account waiting to be put to work.

How easy is it to invest in a Mutual Fund?

It's quite simple! With as little as $500 to start for most mutual funds, your money can start working for you. Plus, you can authorize the Mutual Fund company to withdraw as little as $25 per period you choose (say, every two weeks to match your pay day) and invest it into the mutual fund right away. That means each time you save, you invest automatically! How convenient, right?

The drawback for stocks, bonds, REITs and ETFs are the fact that sometimes $25 per period saved won't you invest even one share of either. Plus, a $10 commission for each trade doesn't leave you with much to invest on a periodic basis.

Mutual Funds allow you to save easily and invest effectively and efficiently. They are great for new or experienced investors, regardless of cash flow.

Are they diversified like ETFs?

Yes, definitely. Like ETFs, there are specialty ETFs and Mutual Funds focused on certain features, but both are diversified to lower risk on your funds. The more companies you own, the less risk of one failing and affecting your portfolio.

In summary, mutual funds are a great way for new investors to jump into the market. When investing with smaller quantities, you need to be very conscious of the efficiency of your dollars.

With time and consistent contributions, mutual funds allow for all types of investors to frequently contribute to their investments easily and efficiently.

To review the other parts of the series, please click below!

Stocks!
Bonds!
REITs!
ETFs!

I hope you gained some valuable insight behind these investment choices. Remember: nobody cares about your money more than you do. Know why before you buy into these products to have the confidence that your money will work hard for you.

Talk soon,
Ary