Chances are, yes. Here’s why.
If you work for a company that offers a retirement plan or Health Savings Account (HSA), you own mutual funds. If you’ve been thinking about opening a College 529 account, you’ll be buying mutual funds.
Here are the top 5 things to know about mutual funds right now.
1. Diversification is built in
You can see how this would diversify your investment. Say, for example, you had $100 to invest. You could either purchase 10 shares of Company A or Mutual Fund B. Let’s also say Mutual Fund B owns shares of Company A, just for fun.
Now, imagine that Company A goes bankrupt. You, as a shareholder, are subject to losing your entire investment if you own that stock. If you owned Mutual Fund B and the same thing happens, your investment isn’t totally lost. That’s diversification.
2. Diversification doesn’t eliminate risk
Wall Street regulators define 9 types of risk. (And this is as boring as it sounds). The one you need to know is Systemic Risk. That’s when the entire financial system bottoms out. No matter what investments you own, you can’t avoid losing value.
3. There are reports showing you who’s making the underlying investment selections
Once you’ve located the fund you want to look up, the main page you’re brought to tells you basic information about it. To find out who’s making the decisions on what the fund invests in – because the fund managers go out the stock market and make stock purchases – click on the Management tab.
You’ll see who’s making the decisions about what to buy and sell within the fund. And exactly how long they’ve been doing it. Past performance is never an indicator of future returns, so even if the fund has been doing well there is no guarantee that will continue. But you want to be smart about your purchase. A long-tenured manager with great performance can certainly be the indicator you’re looking for, or not.
4. And exactly what the fund is buying
Each mutual fund has a specific objective and it won’t change (only by shareholder vote, which is rare). Funds can be conservative [read: less risky] and put value on safety of your initial investment, or the goal can be aggressive growth.
5. Finally, the F word.
- No fee upfront, very little fees for selling, but higher ongoing maintenance fees (C shares)
- Have a sizable fee at the time of purchase, with lower ongoing fees (A shares)
- Or have a nominal fee when you sell, with higher ongoing fees (B shares).
The fee for selling is a sliding fee that decreases each year until the point there’s no fee for selling, usually 5 – 7 years after purchase. All the while, funds can have additional maintenance fees charged annually called 12b-1 fees. These are the things that keep the fund humming & the lights on.
Disclaimer: I do not own VFIAX, which was merely used for illustrative purposes. This article is not a substitute professional financial advice. Please consult a financial advisor when making selections based on your unique financial needs. The information provided by Modern Suzy and accompanying material is for informational purposes only. It should not be considered legal, financial, or tax advice. You should consult with a professional to determine what is best for you.