Understanding Mutual Funds

Monday, April 1, 2019
Understanding Mutual Funds

 Hailed as an efficient way for individual investors to access the market, mutual funds, like other useful investment tools, have become increasingly popular. Since 1969, assets in mutual funds have grown from $48 billion to nearly $8.6 trillion. In just the last 10 years, mutual fund assets have nearly tripled. And today, nearly half of all U.S. households own mutual funds, compared with less than 6 percent in 1980 [Investment Company Institute (ICI),].
So, what is a mutual fund? At its most basic level, a mutual fund is a portfolio of securities owned by a collection of shareholders. While mutual funds have many different investment strategies, they primarily come in three basic types. Equity funds invest primarily in stocks; fixed-income funds invest in government or corporate securities offering fixed rates of return; and balanced funds invest in a combination of equity and fixed-income securities.
According to the ICI, the trade organization representing the mutual fund industry, there are now approximately 8,300 U.S.-based mutual funds. With all the choice available to U.S. investors it’s important for individuals to know about this popular investment vehicle.  

With any investment product, it’s important to understand how it works - its attributes and how it fits in an investment portfolio. The following provides some information about mutual funds.
Diversification. You don’t have to know much about investing to know it’s not wise to put all your eggs in the same basket.  A mutual fund may hold securities from dozens or even hundreds of issues – a level of diversification that few investors can achieve on their own. Through diversification, shareholders can potentially reduce the risks associated with any single security. Diversification helps spread risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. Of course, diversification is not a guarantee of overall portfolio profit.
Professional management. Few people have the time and expertise necessary to select and manage a stock or bond portfolio. When you invest in mutual funds, you gain a team of professional money managers, including analysts and traders who strive to help the portfolio meet its objectives (those dorky financial guys wearing cufflinks and suspenders).
Lower cost.  Just as buying in bulk is cheaper than buying an individual product, securities are generally less expensive to buy and sell when traded in large blocks rather than single transactions. The buying power of a mutual fund generally reduces transaction costs for its shareholders, who benefit by splitting the commissions generally associated with diversification, liquidity and portfolio flexibility.   
Convenience.  You can buy mutual funds directly from a fund company or through brokers, banks, financial planners or insurance agents. Fund shares come in different share classes with different pricing and features designed to accommodate the various lengths of time investors intend to hold the shares. Shares trade at the close of business, and fund companies offer extensive recordkeeping services to help you track your transactions and the performance of the fund. It’s also easy to move money back and forth between your fund account and your bank account for other uses.
Liquidity. While mutual funds are not as liquid as exchange traded funds which trade like individual securities, prices for mutual funds are priced daily.
No guarantees. When stocks make up a good share of the fund’s assets—think equity or balanced funds—the fund’s value will be influenced by the fluctuating value of each stock in the portfolio. Investors need to understand the risks associated with mutual funds when determining whether or not to invest.
Costs. Whether you are investing on your own or find value in working with a knowledgeable financial advisor, take the time to understand what expenses and fees are associated with the fund share class you are purchasing. Each mutual fund comes with a prospectus, which includes a wealth of useful information about the fund objective, strategy, portfolio management team, fees, expenses and historical rates of return.  You can also read a fund’s statement of additional information for additional information – both the prospectus and statement of additional information are available for free from fund companies and are posted on fund company websites. Those investors who work with financial advisors should also ask their advisor how she or he is compensated for the advice they are providing.
Risk versus Reward
All mutual funds involve some sort of investment risk. Choosing investments that match your risk tolerance is an important part of planning your portfolio. Generally, the higher the potential return the greater the risk that you could lose part of your investment.
Understanding the ins and outs of mutual fund investing takes time. Take the time to educate yourself about this popular investment product and consider working with a knowledgeable financial advisor to help you develop an investment strategy to support your unique investment goals, time frame and risk tolerance.  


The views expressed represent the opinions of Benedetti, Gucer & Associates and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Additional information, including management fees and expenses, is provided on Benedetti, Gucer & Associates’ Form ADV Part 2, which is available upon request.

The use of the term “RIA” does not imply a certain level of skill or training.

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