Let’s say you have $5,000 saved up and you want to invest it…but you don’t know how.
You might try and learn the market, and possibly pick out a few stocks you want to invest in. That’s when you decide that you don’t have the time or patience to micromanage your investment portfolio. You just want an investment portfolio, and for someone else to manage it for you.
That’s where mutual funds come in. Instead of picking stocks, mutual funds let you join a group of investors who have an broker or investment firm pick the stocks they think are best. You don’t have to worry what might do well and what might tank; they do the worrying for you, buying and selling stocks when they think the time is right.
For new investors or workaholics, this approach seems like a great deal, and with some mutual funds, it is. Yet there are also several downsides to mutual funds, and they could cost you.
Mutual funds take capital (money) from a group of investors like you and use it to create an investment portfolio.
A broker, brokerage, or investment firm runs the mutual fund, and they buy stocks and/or bonds that they think will do well.
When they think stocks have outlived their usefulness or potential, they sell them and either liquidate the returns (put the cash back into the portfolio) or reinvest the returns in better stocks.
If you invest $5,000 into a mutual fund, you own $5,000 worth of whatever securities they own.
If they bought ten companies and five bonds, you own a percentage of those companies and bonds proportionate to your investment. If you put more money into a mutual fund, you’ll have a higher stake in whatever is in the fund’s portfolio.
Mutual funds are essentially just an investor or investment group picking stocks they think will succeed for your benefit.
Unfortunately, they’re not always right. One bad pick — or several — can mean severe losses for the mutual fund.
You could always gain money, but you could lose money, too.
Mutual funds also don’t come cheap. Instead of charging a fee on top of your investment, they take a percentage of your portfolio — regardless of how well it’s doing.
Mutual funds often take 1% every year from the balance of your portfolio, or .25% every three months. So if your portfolio went from $5,000 to $6,000, they’ll take $60. If it went from $5,000 to $2,000, they’ll take $20, even though your portfolio declined.
Stocks have a value that changes by the second during trading hours. Mutual funds only change in value once a day.
Mutual funds report their price after the market closes, between 4 and 9 PM. Also, you can’t buy a mutual fund through a broker like a common stock. You have to buy into them directly through the person or firm managing the fund.
If you don’t have the time to learn about the market and research the companies you think you should purchase, then mutual funds might be for you. Just know that many of them require a minimum buy-in, which could vary in price per fund. They will always take fees from you, regardless if the market is up or down.
If you’re okay with this, then you might want to find a fund that fits you. Some funds in vest in energy-only stocks. Other funds invest in clean energy-only stocks. There are hundreds of mutual funds out there, all with different investment strategies and ideas of what may or may not be successful. All you have to do is choose!
Share this story with your friend who are too busy to make their own choices. It might make them filthy rich!