Episode #42: Mutual Fund FUNdamentals [Part I]

Mutual Fund Fundamentals


November 11th, 2020

What are mutual funds? Why would you want to buy them? How can you buy them? These are just a few of the questions I’m going to answer in—drumroll please—a whole series about mutual funds. In this episode of Making Finance Fun, I’ll cover the mutual fund fundamentals: what they are, their history, why they were created, and more. If you’re interested in investing in mutual funds, do not miss this series!

Outline of This Episode

  • [3:11] What are mutual funds?
  • [8:52] The history of mutual funds
  • [11:02] Why mutual funds were created
  • [15:13] The lowdown on modern Mutual Funds

What are mutual funds? 

According to Fidelity, Mutual Funds are “Investment strategies that allow you to pool your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own.” It’s often referred to as a portfolio. The decisions to buy or sell funds are made by managers. It’s a gigantic pot of investments that someone manages that you can purchase. Why would you want to do this? 

I don’t know how many publicly traded stocks are out there—but there are a lot. Trying to own a chunk to get a diversified portfolio is difficult. Even deciding what qualifies as “diversified” is difficult. Then you have to manage that portfolio. That’s a lot of time and mental energy. Mutual funds are a one-stop-shop for stocks, bonds, and other types of investments. You can buy one investment that does the work for you. 

Think of your mutual fund as a public pool with lifeguards monitoring the pool. The people swimming in the pool are your investments. The lifeguards are the mutual fund portfolio managers. They watch over the investments and decide what to buy and sell. 

What is their common purpose? And what is a prospectus? Listen to learn more!

The history of mutual funds

The first mutual fund was invented in 1924 and is still around today: the Massachusetts Investors Trust. It’s a stock mutual fund with 71 holdings in it (things like Microsoft, Google, Medtronic, J.P. Morgan, Apple, etc.) that includes a broad range of investments. It’s 26% technology, 18% healthcare companies, 11% communication, and 10% financials with a few other smaller categories. There are just under $6 billion in the fund with 3 portfolio managers. 

WHY were mutual funds created?

There are a few different reasons mutual funds were created: 

  1. It’s an easy way to diversify your investments in one fell swoop. You can get everything you’re interested in buying in one order. It’s convenient
  2. They offer professional management. They’re the lifeguards at the pool. They have access to resources and research to make decisions on what to buy, hold, or sell. You unload the decision-making to someone else.
  3. A mutual fund offers liquidity and convenience. It’s easy to buy and sell online. I haven’t heard of anyone who couldn’t sell their mutual funds. 

What Modern Mutual Funds look like

As of right now, there are approximately 7,945 mutual funds to choose from in the United States alone. The total investment in mutual funds in the US is over $21 trillion (as of the end of 2019). To put that into perspective, the entire US economy is somewhere around $20 trillion. There’s more money sitting in mutual funds than the US economy. It’s mind-boggling

What can a mutual fund look like? There are stock mutual funds, bond mutual funds, real estate mutual funds, alternative investment funds, sector mutual funds (i.e. technology or consumer staples), and much more. There’s probably a mutual fund for any sector you can think of. 

Should you buy mutual funds? How do you choose a mutual fund? Which one is best for you? What are the common fees? To learn more, listen to the whole episode. You can also learn more by subscribing and follow along through this special series on mutual fund fundamentals. 

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