One of the easiest and most efficient opportunities for young investors is a mutual fund. With one fund, you can gain access to thousands of diverse holdings in a portfolio that is both easy to use and customizable. But what exactly is a mutual fund and how do you invest in it?
U.S. News and World Report compares a mutual fund to a mixed-berry pie. Within the unifying crust, you have many different types of berries—or, in a mutual fund, many different investments like stocks and bonds. When you buy into a mutual fund, you are essentially purchasing a slice of that pie, including a fraction of each investment within it.
The reason it’s called a mutual fund is because many different investors own a piece of the much larger pie. By pooling their money, investors like you can own a small stake in a wide variety of stocks. This is one of the best perks of a mutual fund—you get the benefits of a diverse portfolio, containing multiple stocks, without having to pay for hundreds or thousands of individual shares. And, maybe more important, without spending the time necessary to research the individual investments.
How Much Does It Cost?
Obviously, such easy access to a multitude of stocks has a price. Most mutual funds carry a yearly upkeep fee, known as the Annual Expense Ratio. Depending on the size of your share, you’ll likely pay between 0.1% and 2% of the value per year.
Moreover, some funds charge an additional fee known as a “load” when you buy or sell shares. Loads can vary between 1% and 5.75% of the sale’s price. These fees are a form of payment to the people managing the mutual fund.
Who Manages the Mutual Fund?
There are two types of mutual fund management: active and passive.
An active mutual fund is managed by a team of highly-trained analysts and traders, who attempt to outperform the market by keeping an eye on which stocks to buy and which stocks to sell every day. Such funds usually run a higher fee, as the managers work diligently to ensure you own the stocks and bonds with the most promise.
Meanwhile, a passive mutual fund aims to match market benchmarks, not outperform them. Your passive fund manager will not actively pursue the best stocks to buy or sell every day. Instead they watch a pre-set group of financial vehicles. Thus, you will pay lower fees on a passive fund.
How Do I Start?
The best way to enter a mutual fund is by opening an investment account with a mutual fund company, like E-Trade, TD Ameritrade, Charles Schwab, Fidelity, or Vanguard, which invented the category. An adviser will help you choose the fund that best fits your financial goals.
Alternatively, you can consider using a robo-adviser. These algorithm-based programs will ask you a few survey questions, before automatically matching with the best mutual fund for you. Robo-adviser fees are typically pretty low, which means you’ll save money while you’re building wealth.
But you might already be part of a mutual fund without realizing it! If you pay into a 401(k) through your employer, you are indeed a stakeholder in a mutual fund. Don’t hesitate to reach out to an adviser to understand your fund choices and options.