What Do Mutual Funds and Shopping Carts Have in Common?
In simplest of terms, a mutual fund is created by a group of people who pool their money to invest in stocks, bonds and other securities. Mutual funds are one of the most common investments found in brokerage accounts. Check out these recent statistics:
Why are they so popular? Maintaining a diversified investment portfolio can be time consuming and difficult, not to mention stressful. In addition to flexibility and ease of withdrawals, mutual funds offer access to professional money management and diversification at a relatively low cost.
Each mutual fund issues a prospectus, a lengthy document, which outlines the funds’ guidelines and objectives in excruciating detail. If you can suffer through it, you’ll find insight into how the fund will be managed and what type of investments it will hold. Often times, websites such as Morningstar.com or the mutual fund company itself, will provide easier to understand graphs and information about the fund.
So how do mutual funds actually work? Surprisingly, a lot like a shopping cart:
Where Do You Get Mutual Funds?
One of the great things about mutual funds is you can pick them on your own or ask for professional help. You can buy them from a stockbroker, directly from the mutual funds companies or hire an investment adviser to buy them for you.
Do-It-Yourself: If you have the time, the interest and the expertise, you can build your own investment portfolio and select mutual funds for yourself. Some online brokerage firms, such as Fidelity, have tools to help you make your own selections. You can also contact the mutual funds directly. Mutual funds that work directly with the investor are called “no-load” mutual funds, because they don’t pay commissions to brokers to distribute them. Some no-load mutual funds, like Vanguard, hire their own brokers to work directly with investors over the phone.
A Few Tips on Picking Funds
If you are going to pick funds yourself, here are a few tips to get started:
Buy from a Broker: For investors looking for help, stockbrokers and registered representatives regularly recommend “load” mutual funds. It is important to note that securities regulations require that stockbrokers make suitable mutual fund recommendations to investors. Brokers receive commissions for selling these mutual funds to their customers.
Hire an Adviser: Investment advisers will manage your portfolio, including mutual funds, for a charge of 1 to 2% per year (based on the value of your individual account). Technically, this professional is called an investment adviser representative and the firm is called a Registered Investment Adviser, or RIA. Most investment advisers use no-load mutual funds when building an investment portfolio for their clients. Sometimes they will also include load funds, but the investment adviser can usually get them “at cost” without the applied sales charge; the load fund is then referred to as being “load-waived.” It is important to note that lines have blurred over the years between these different purchase options. For example, some stockbrokerage firms also act as investment advisers (if they are appropriately registered).Whether you choose them yourself, or with the help of an adviser, mutual funds can be a good way to get diversification and professional management in your investment portfolio.
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.