Introduction to Mutual Funds

Most people have heard of mutual funds….or at least seen those investment TV commercials with the proper looking dude who promises to make you a whole bunch of money with your investments.

What is a mutual fund?
The concept is actually very simple. It is a collection of stocks and or bonds. The easiest way to think about it is that it is a group of people that have come together to invest their stocks. Each person owns shares which represents a portion of the fund. A mutual fund might invest in 20 stocks or it might invest in 200. It just depends on the fund. Mutual funds are managed by professionals that it is their job to manage everyone’s money.

What are some of the advantages of mutual funds?
Its Simple – Its very easy to set one up through a local broker or online and a lot of places have automatic transfer so you don’t even have to do anything….it just takes say, $100 per paycheck out.
Diversification – Mutual funds allow you to logically put your money in one place, but physically have it spread out, lessening risk.
Low Trading Cost – Because the manager moves all the money in big amounts, there are not the huge costs of moving money around that can pile up with piecemeal stocks.

What are some disadvantages of mutual funds?
Less Money Control – What is an advantage is also a disadvantage. You do not get to pick the exact stocks that your money is buying.
Costs – Mutual funds take some of your profits as a price for being in the fund.
Management – Professional managers don’t necessarily know anything more than an average Joe off the street. I saw an article recently in Men’s Health where they picked stocks by throwing darts at a paper and then compared it against a few different peoples picks and funds. Guess what? The dart won, HANDILY.
Most Funds SUCK – Ok so this is somewhat biased, but the VAST majority of mutual funds (80%) actually under perform compared to the market!

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