Mutual Funds: Explained

Mutual funds can certainly sound confusing – especially when there are so many options available.  So for those who do not know what a mutual fund is, let me explain it the best I know how.

If something has been FUNDED, it means that money has been given to it.

If you and I come to a MUTUAL agreement, it means that we both were involved in making the agreement.

So if you and I have MUTUALLY FUNDED a project, then it means that we both provided money for the project.

A MUTUAL FUND means that you and I have both put our money in the same place.  It is not unusual for a mutual fund to have over 5,000,000 people MUTUALLY FUNDING the same investment.

So we have mutually funded an investment along with three or four million of our closest friends.  The amount you have invested is different from how much I have invested, but it is all in the same place.

So, we now all understand that we have mutually funded this investment and that it is called a mutual fund.  The next question to answer is: “Where does the money go once it is in the mutual fund?”

Well, each mutual fund has a specific objective.  Some mutual funds have an objective to produce income.  Others have an objective to maximize the long-term growth of the invested money.  Still others may have an objective to invest only in international companies.  The bottom line is that each mutual fund has a specific objective or charter.

Based upon a mutual fund’s charter, the mutual fund managers will purchase part-ownership in a lot of companies.

The Mutual Fund managers use the money provided by you, me, and three million of our closest friends to purchase ownership in anywhere from 50 to over 1,000 companies.  As these companies earn profits and grow, the value of the investment grows.  This means that each individual who owns a portion of the mutual fund can enjoy that growth as well.

I hope this post has helped understand exactly what a mutual fund is. Let me know below if you have any additional questions about mutual funds.

How To Locate Incredible Mutual Funds

Choosing the right mutual fund can be a daunting task if you're not sure where to begin. Here is a three-part approach to help you navigate the world of mutual fund investments and make informed decisions":

Determine Your Investment Category

Before diving into specific mutual funds, it's crucial to identify the investment category that aligns with your financial goals and risk tolerance. Make sure to consider factors such as your investment horizon, risk tolerance, and financial objectives.

Reviewing Mutual Funds

Once you've narrowed down your preferred investment category, it's time to review individual mutual funds.

1. Utilize Mutual Fund Screeners: To streamline your search, take advantage of online tools like CNN's Mutual Fund Screener and Morningstar's Mutual Fund Screener. These platforms provide a wealth of information on various funds. For example, you can set specific criteria, such as funds that have delivered an average annual return of 10% or more over the past decade. This filtering process can help you identify mutual funds that meet your criteria efficiently.

2. Check Your Retirement Plan Options: If you have access to an employer-sponsored retirement plan (e.g., 401(k), 403(b), Simple IRA, or TSP), review the mutual fund options available within the plan. Employer-sponsored plans often offer benefits like reduced fees, matching contributions, or other incentives that can boost your investment returns. Make sure to take full advantage of these opportunities to preserve and grow your wealth.

3. Seek Professional Guidance: Consider meeting with a financial advisor at least annually. Professional advice can provide you with a clearer perspective on your investments, help you set realistic financial goals, and make necessary adjustments to your portfolio. Financial advisors can also provide valuable insights into market trends and the performance of different mutual funds.

Analyzing Mutual Funds

When evaluating individual mutual funds, pay attention to the following characteristics:

• Age of the Mutual Fund

• Investment Growth

• Initial Investment Requirements

• Fund's Objective

Choosing the right mutual funds involves a systematic approach that combines research, analysis, and professional guidance. Remember that not every mutual fund will be suitable for your financial objectives, so be prepared to revisit your search criteria and start over if needed.

5 Basic Steps To Investing

Investing! This is consistently given as one of the most confusing topics individuals face. Before we begin, you need to assess what investments you currently have. You might be saying, “Joe, I don’t have any investments.” My question to you would be: do you contribute to some type of retirement plan at work, own a home, or own a business? Investing is much more than owning stocks. To start, let’s make a list of all your investments. 

Step 1: Evaluate & Diversify 

Now that you have all your investments listed, let's evaluate to make sure they are diversified. I’m sure you’ve heard the saying, don’t put all your eggs in one basket. This directly relates to investing! A key step when investing is to diversify your investments. For example, you should not put all your money into one company’s stock, instead spread your investments out. By spreading out your investments you greatly lower the risk of your investment.

An easy way for you to diversify is to invest in mutual funds. A mutual fund allows you to purchase a portion of many stocks and bonds with a single share purchase. This purchase automatically diversifies your investments, even though you’ve only bought one share! Also, don’t just think stocks. Invest in a new business or a home that can be rented out. Investing is much more then the stock market. You have a world of things to invest in – real estate, land, new businesses, or even your own business!

Step 2: Automate Your Investments

Make your investments automatic! Your bank account can be set up to auto-draft money into different investment plans (401k or a child’s 529 college savings plan).

When your investments are automated, it prevents you from forgetting to transfer money each month. It also eliminates the possibility of using that money for splurge purchases. This is awesome for those of us who are highly susceptible to spend any and all extra money! You’ll also see your net worth increase every single month!

Step 3: Get the Free Money 

Yes, I said FREE money. Many employers will match a portion of your contributions into a self-directed retirement plan! I encourage you to go to your human resource department and sign up for the retirement plan. Start investing money into it immediately! Contribute enough money to obtain the entire employer match. Remember, this is really just FREE money!

Step 4: Unleash the Power of Compound Interest

Have you ever heard the saying, “My money is working for me”? This is exactly what compound interest does for you! When you utilize the power of compound interest, you’re allowing the interest you’re making to also earn interest.

For example, let’s say we have $100 in an investment account that grew to $105 in one year. This is the equivalent of 5% interest. Now suppose the $105 is left alone for another year and continues to grow at a rate of 5%. Will it be paid another $5 interest when the second year is up? No! It will be paid $5.25 because interest was received on $105 – not just $100. Interest earning interest!

Remember,  you are only investing $100 each month! After 40 years, you’ve only invested $48,000 BUT your account balance is $1,176,477! This means that $1,128,477 is the interest you have gained!

Now do you see the POWER of compound interest?

Step 5: Continue to Learn about Practical Investing Opportunities

There are so many different types of investment opportunities, so I’ve broken down a few of them.

Stocks – When you own stock in a company, you technically become a part owner of that company. You have some claim to the assets and earnings of the company. Stocks are foundational to most investment portfolios. They are known to be very volatile in the short term but have historically outperformed other investments in the long run. 

Bonds – A bond is a large debt owed by a company, government, or even a school, where the borrowing institution has agreed to repay an established amount of interest payments for a set period of time. When this time expires, the borrower then returns all of the principal back to the lender(s). Bonds can vary in maturity times anywhere from 1 year to 30 years. I like to think of my personal residence as a bond investment. A bond is generally less risky.

Mutual Funds & Exchange Traded Funds (ETFs) – Mutual funds and ETFs let you accumulate a wide variety of investments that couldn’t normally obtain without consuming large amounts of time and money. Mutual funds and ETFs are funded “mutually” by you, me and millions of our closest friends. Our money is pooled together and then used by the “mutual fund managers” to invest in hundreds of other company stocks, bonds, and other sorts of investments. Usually, mutual funds and ETFs have specific charters that direct their investments. Our mutual fund might only focus on established companies in the USA while another could focus on investing in up-and-coming companies in third world countries.

Other Investing Opportunities – People so often hold themselves to these common types of investing and never branch out. Investing opportunities are all around you! You can invest in a small home and rent it out. You could invest in small businesses in your community. When you are investing, you can think outside the box. Some of the greatest returns can be found when investing in unorthodox ventures.

Next Steps

• Review your investments and know what you are invested in

• Start to think OUTSIDE of the stock market when you’re investing

• Start investing!