More than $49 trillion in assets are kept in global regulated open-end funds, according to data from the Investment Company Institute. That said, roughly $21.8 trillion of total net assets are held in ETFs and mutual funds.
What Are Mutual Funds?
A mutual fund is an open-ended investment company that offers its shares to the public. However, instead of trading on an exchange, investors purchase and redeem shares directly from the fund. That said, there are thousands of mutual funds to select from, as they’ve been around for nearly a century.
Now, with a mutual fund, money is pooled together and invested based on the fund’s goals. Some mutual funds specifically invest in stocks, while others might invest in bonds or money market funds.
However, what the fund invests in is not a mystery. They lay out their strategy, risk, track record, a background of the management and portfolio manager(s), and the fees the fund charges, all in what is called the prospectus.
For example, the Oakmark Fund has an objective of long-term capital appreciation. It attempts to achieve this by investing in a diversified portfolio of large-cap stocks, using a value investment philosophy.
That said, when you invest in a mutual fund, you also invest in the fund’s manager ability to find winning stocks.
Not All Mutual Funds Are The Same
Some mutual funds invest in growth stocks, while others focus on value. A fund objective could be international, mid-cap, small-cap, sector-related, you name it, there are thousands of them.
There are even mutual funds that invest in other funds. Now, you might be asking what’s the point of that. It’s simple. Selecting the right fund can be just as profitable as picking the right stocks, and there mutual funds for that.
Now, here is a list of the type of fees that you might expect from a mutual fund: shareholder fees (fees paid directly from your investment) and annual fund operating expenses. Included in the fund’s operating expenses are the management fee, distribution fees, and other costs.
That said, other fees associated with the fund could be a sales charge, a fee your broker gets a commission on for introducing the fund to you. Also known as a “front-end load.”
Now, a “back-end load” is a fee that your broker gets when you sell your shares of the mutual fund. Not all mutual funds have front-end or even back-end loads; however, it’s something you should be aware of before deciding to invest in a fund.
That said, unlike a stock or ETF, an investor does not have to pay a commission after each transaction its mutual fund makes.
Mutual funds have taken a backseat to Exchange Traded Funds (ETF) over the last decade. The knock on mutual funds has been the average fund manager can’t beat the returns of the S&P 500. ETFs offer investors a chance to get into similar securities a lot easier and cheaper. Besides, ETFs disclose holdings a lot more frequently than mutual funds do.
Another issue mutual funds face is that they typically need to stay invested all year-round. Now, if you speak to any good trader, they’ll tell you that stock market isn’t always to read.
Sometimes the market trend is bullish, others its bearish or even sideways. During periods of uncertainty, it makes sense to reduce your exposure to stocks and get defensive. However, many mutual funds are long-only, and some are so big that it makes it difficult for them to stay nimble.
Mutual funds are not nearly as exciting as they were 15-20 years ago, but they still have a place in today’s financial market and most likely here to stay.