Financial Foundations: Mutual Funds

Hi! I’m Nick, and welcome to Financial Foundations. I’m going to cover several concepts of investing that may seem confusing and show you that they’re actually simpler than you think. Let’s talk about mutual funds.

So, what is a mutual fund? Well, a mutual funds is an investment that allows thousands of people to invest their money together with a professional money manager. That money manager then invests that money into various stocks, bonds, and other investments that he or she personally hand-picks.

Mutual funds are great for any type of investor because they offer tremendous diversification. A single mutual fund could invest someone’s money into as many as 25 to 100 various stocks and/or bonds. Still confused? Let me introduce to you my friend Josh.

Josh is working part-time while he goes to school. He wants to start investing $100 each month into stocks. His dad warned him about only investing into one single company as it’s much easier to lose your money when you don’t diversify it into several different companies’ stocks.

Josh finds it difficult to just buy one company’s stock with $100, let alone trying to buy 25 different stocks.

However, Josh’s older sister Lisa, a business student, tells him that there’s a solution to his predicament. Mutual funds! By investing in a mutual fund, Josh and all the other investors of that specific fund each get a portion of ownership of all the stocks held by that mutual fund. So, Josh can invest as little as $100 per month, while someone else could invest $1,000 per month, or someone could even invest $1,000,000 per month.

Like with all stocks, each person’s earnings would be awarded proportionately, depending on how many shares they buy. But, no matter how much a person invests, they all get the benefit of owning all the investments within that mutual fund. In other words, all investors, big or small, get the advantage of diversification and professional money management.

In simplest terms, a mutual fund is a large pool of money contributed to by many different investors, who all the get the exact same rate of return and diversification, no matter what amount of money they invest.

There you go! You now know what a mutual fund is. I’m Nick, thanks for joining me on Financial Foundations, and I’ll see you next time!