So you’ve been looking at different investing concepts, thinking about the stock market, and getting overwhelmed with thoughts of “I should be doing more with my money.”.
But like the rest of us, you don’t have the Jeff Bezos money that would make buying 30 companies every month a realistic possibility. And between your job, your career, and your loved ones, you just don’t have the time to analyze the stock market and compare economic trends.
If this scenario sounds familiar, many personal finance and investing gurus will recommend that you give mutual funds a try.
But what is a mutual fund exactly? And should you give it a try?
We’re about to give you a breakdown of mutual funds. All you have to do is keep reading.
What Is a Mutual Fund?
A mutual fund is an investment type that takes money from a bunch of investors and uses it to purchase market assets and securities.
Who decides what money goes where?
The fund’s managers. These folks will buy the companies and assets that they think will generate the best returns under the fund’s stated objectives.
In short, mutual funds are the kind of investment opportunity that lets you throw money at a share and say, “Excuse me while I sit back and collect my money.”.
What Are the Benefits of Investing in Mutual Funds?
We’ve talked about what a mutual fund is, but that doesn’t fully explain why you’d want to invest in one. By our count, there are at least three benefits of investing in a mutual fund:
Let’s say you believe that the tech sector is going to crush it in the coming years. Or maybe you’ve always held the opinion that European banks are the long-term play everyone’s been sleeping on. But on a personal level, purchasing 10 tech stocks and 15 foreign banks every month would be way too expensive for you.
A mutual fund can give you the ability to “buy” 20 stocks or more in a single purchase. This makes them a fantastic choice if you want to diversify your portfolio.
2. Set-It-and-Forget-It Investing
You’re a busy person. You’ve got your day job, your family obligations, your hobbies, and a list of Netflix shows you’ve been meaning to watch but haven’t yet gotten to.
With mutual funds, you can leave the investing to the professionals. All you have to do is buy shares and watch the value of your portfolio grow.
3. Reduced Risk
If you buy a stock in Widgets Inc., a price drop can make your shares worthless. With mutual funds, however, if one stock takes a tumble while the others go up or stay the same, the effects on your portfolio value are going to be less drastic on a day-to-day basis.
What Are the Downsides of Investing in Mutual Funds?
We’ve just talked up the positives with mutual funds, but what about the cons? Here are a few mutual fund drawbacks that you may want to be aware of:
1. There are Major Costs
Talented money managers don’t work for free. And similarly, operating a mutual fund also takes money. What this means is that a 10% mutual fund return isn’t the same thing as a 10% gain for your account. Your true rate of return has to factor in expenses.
You can read about this more at https://www.brandonrenfro.com/gross-expense-ratio-what-it-is-and-why-it-matters/.
2. Beating the Market Is Hard to Do
From 1926 to 2018, the S&P 500 had an average annual return rate between 10% to 11%. While it’s possible for investors to get lucky on a year-to-year basis, being able to beat the market consistently is hard. So hard that there’s an active group on the “index fund” side of the index fund vs mutual fund debate that has collectively shrugged its shoulders and said, “If you can’t beat the market, you might as well join the market.”.
Mutual funds are supposed to beat the market, but there’s a reason why many long-term investors will often choose to avoid trying to time the market.
3. Slower-Than-Molasses Trade Execution
You’ve got an insane morning ahead. You’ve got things to do and stocks to buy, and so you purchase a few mutual fund shares before going about your day.
Once you’ve bought the shares, the money is spent, and that’s the end of it, right?
Well, not exactly.
Mutual funds trade once per day, and the price you were shown at the time of purchase may not be the price you’re charged after NAV calculations are done. This is probably not a big deal if you’re not too fussed about the price. But if you were trying to buy a dip or time your purchase, the slow execution associated with mutual funds is something you have to plan for.
Here’s How You Can Find Good Mutual Funds to Invest In
You can set yourself up for success by asking questions like “What kinds of returns has this fund generated recently?”, “What will my returns after expenses look like?” and “Does this fund’s philosophy have a good shot at long-term success?”.
To that end, we’ve got a list of three mutual funds that you may want to consider purchasing:
1. Bridgeway Small-Cap Value (BRSVX)
As the name would suggest, this is a fund that primarily focuses on purchasing smaller companies in order to profit off of their capital growth. With stunning YTD returns of 45.32% and a five-year annual return of 17.19%, the fund’s .94% expense ratio makes it a solid buy.
2. Fidelity Growth and Income (FGIKX)
This mutual fund is focused on dividend-paying stocks with growth potential. When you look at this fund’s current performance, there’s no arguing with results like 19.1% YTD on an expense ratio of .50%.
3. Vanguard Windsor II Investor (VWNFX)
This mutual fund invests in publicly traded companies that are underpriced relative to their actual value. This one has a super-low expense ratio at .34% alongside a very solid 16.3% five-year annual return.
Should Mutual Fund Investing Be On Your Radar?
Alongside index funds and ETFs, mutual funds are an investment approach that lets individual and group investors cash in on a trend or a philosophy without having to shell out tens of thousands of dollars.
Put simply, the answer to the question “What is a mutual fund?” is that it’s a financial vehicle that could be your ticket to steady gains and a more diversified portfolio.
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