by Adam Smit

Mutual Fund Basics

Per the Securities and Exchange Commission, “a mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.” The following article will offer a high-level educational overview of mutual funds.

Underlying securities within a mutual fund may include stocks, bonds, cash equivalents, or even alternative investments such as real estate, commodities, or currencies. Some mutual funds are broadly invested while others may focus on a narrow area of the investable market such as a specific geographic region or industry.

Mutual funds may be managed actively or passively. Actively managed mutual funds have professional portfolio managers that analyze securities for consideration to buy, hold, or sell within the mutual fund with the intention of making investment choices that are in-line with the objective of the fund. Common objectives of a mutual fund are growth, income, or a combination of growth and income. Passively managed mutual funds attempt to mirror an index such as the S& P 500. “Index funds” are passively managed.

Passively managed mutual funds generally have lower expenses and are often more tax efficient as there is generally less turnover

(buying and selling) within a fund.

Advantages of mutual fund may include diversification,

professional security selection and management, often have low

minimum initial investment, and are flexible for subsequent investment. The diversification element, or allowing an investor

to own potentially hundreds or even thousands of underlying stocks or bonds within one portfolio, is a key feature of mutual funds. Mutual funds may offer investors the opportunity to invest in areas of the market, such as foreign stocks, that would be difficult to invest in on an individual basis. Drawbacks of mutual

funds include the costs and associated fees of a mutual fund and a mutual fund may not achieve its stated objective. Some investors do not like that they personally lack control in determining the underlying investments held within a mutual fund. As is the case with most investments, there are “pros” and “cons” with mutual funds.

Mutual funds are popular investment vehicles often offered through company sponsored retirement plans, individual retirement accounts, and education savings accounts. Investors may also invest in mutual funds through brokerage accounts.

Mutual funds are offered by prospectus. A prospectus contains information about the fund which includes the objective and strategies of the fund, risks, fees and expenses, portfolio managers, and historical returns. Mutual fund investors should carefully read the prospectus prior to investing.

Adam Smit is a CERTIFIED FINANCIAL PLANNERTM. His practice emphasizes an investment philosophy of investing in quality while holding for the long-term. Mutual funds are offered by prospectus. This article is not a solicitation of mutual funds but rather to be educational and informative. Securities offered through LPL Financial. Member FINRA/SIPC.

1 – www.investor.gov