What are Mutual Funds (MFs)?

 

Sooper Cooper

Howdy Wall Street Willy! I have one really big question for you.

Wall Street Willy

Yes, what is it?

Sooper Cooper

What is a Mutual Fund?

Wall Street Willy

Well, a Mutual Fund is basically a kind of fund where people pool or put together their money to let their mutual fund managers invest it in stocks, bonds and other things.

Sooper Cooper

Whoa, that’s really awesome! I have another question. What do they invest in?

Wall Street Willy

Mutual funds can invest in stocks, bonds or any other kind of securities.

Sooper Cooper

I have another question. What are the different types of mutual funds?

Wall Street Willy

Well, there are many different kinds, including:

  • Stocks or bonds
  • Large cap, mid cap or small cap
  • Sector specific or broad based
  • Actively managed or passively managed
  • And many more

But don’t worry, we will cover all of these topics in detail later, so it will be easier for you to learn.

Sooper Cooper

Okay, very good. But why would I even want to invest in mutual funds, and not directly in stocks or bonds?

Wall Street Willy

Well, there’s two reasons.

Number one is that it’s diversified, because if you invested on your own, then you will have to buy one stock of each company which would be very expensive.

But if you have a mutual fund that invested in a 1,000 companies, then you would have to buy only 1 stock of the mutual fund.

Sooper Cooper

Whoa, that’s really awesome!

Wall Street Willy

And the second reason is that you would leave the investment to the experts who manage the mutual fund.

Sooper Cooper

I have another question. Do I pay extra money for this service?

Wall Street Willy

Yes, sadly you do. You pay the extra money in fees and loads. Fees are percentages of what you have invested.

Sooper Cooper

How do I make money from mutual funds?

Wall Street Willy

Well, there’s 2 ways.

Sometimes, you get paid with dividends. Dividends are certain percents of the amount of money you have invested in that mutual fund, that you get as earnings every year.

And also, if the price of the mutual fund goes up, then you can sell it to get more money than you paid for it.

Sooper Cooper

That’s really good – I hope I make money!

Wall Street Willy

Well, I can never tell because I cannot predict the future!

Sooper Cooper

Anyway, I have another question. How do you select a mutual fund (MF)?

Wall Street Willy

Well, there are a couple of basic things that you consider when investing in a mutual fund.

  1. Number one is what does it invest in – stocks or bonds
  2. Does it invest in a certain sector or kind of investment, or does it invest in everything at once
  3. Its risk profile – how risky it is or how likely is it that you’ll make a lot of money or lose all of your money
  4. It’s past performance – that is, how well it has done or how bad it’s done in the past – if it’s gone up or down, and
  5. It’s fees, which we have covered earlier

Sooper Cooper

And one more thing. How much money do I need to invest in a mutual fund anyway?

Wall Street Willy

Well, at the beginning, you usually have to pay a minimum of $1,000 or $2,000.

But after that, you can invest more money in multiples of $100.

Sooper Cooper

Okay. How do I buy and sell mutual funds?

Wall Street Willy

Well, unlike a stock, you can buy and sell a mutual fund directly from the mutual fund companies, or from brokers.

But if you buy directly from the companies, then usually, you don’t have to pay a commission. That’s basically an amount that you pay for brokers to make the transaction. Or you can pay brokers to do it.

But when choosing between the two, consider the commission that they charge.

Sooper Cooper

And one more thing. Can I create my own mutual fund?

Wall Street Willy

Well, not exactly. It would be very difficult.

But theoretically, yeah, you could.

Sooper Cooper

Okay!

Wall Street Willy

And one more thing Sooper Cooper.

Sooper Cooper

What?

Wall Street Willy

Finance is your friend!

Post Author: easypf

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