Investing in Mutual Funds

Most investors have a passing familiarity with mutual funds as a result of investment opportunities offered within their employer-sponsored retirement plans, advertisements in financial publications, or conversations with friends or advisors about investment opportunities. That familiarity often leads an investor to consider investing in the first place.

Any investor who is considering how to invest in mutual funds will be best served by first formulating a greater strategy that addresses their short- and long-term financial goals. Zoe Financial’s network of fee-only advisors provides support to investors as they attempt to define and achieve those goals.

Common Characteristics of Mutual Funds

But what is a mutual fund? It is an investment vehicle that invests in a basket of securities, often based on a guiding philosophy, investment objective, sector or country. Mutual Funds allow investors to invest in a wide variety of securities and build a varied portfolio that they might otherwise have difficulty acquiring or managing on their own.

Mutual Funds can be passively or actively managed. The actively managed mutual funds have a team that makes buying and selling decisions at the stock or bond level in an attempt to outperform a specific benchmark. Investors benefit from the diversity of securities within a fund because any event that adversely affects one of the fund’s securities will likely not impact the value of the fund’s other securities by the same magnitude. 

Other mutual fund potential benefits include affordability and liquidity. Many funds have low initial investment thresholds and investors can easily pull money out of funds at the end of every trading day.

The Different Types of Mutual Fund Investments

Mutual funds typically fall into one of four categories:

    1. Money Market Funds. Funds that invest in money market instruments, such as federal or state government-issued bonds, are considered to be the safest of all mutual fund investments. The trade-off for that safety is that these funds offer lower returns than stock, bond, and other managed products.
    2. Bond Funds. Funds in this category invest in government and corporate bonds and other privately issued debt instruments. The returns generated by bond funds are a function of the interest rate and the price of the bonds. The returns may be consistent, but the share price of a bond fund will vary inversely with market interest rates, i.e. as market interest rates go up, the bond fund share price will go down.
    3. Stock Funds. Investment in corporate stocks are the most common type of mutual fund. Within the broad category of stock funds, investors will find narrow subcategories, including:
        • Growth funds that aim for above-average share price growth when compared to the general equity markets;
        • Income funds that include stocks from corporations that make regular dividend payments;
        • Index funds that include baskets of stock that match the components of market indices, such as the Dow Jones Industrial Average;
      • Sector funds that target companies in particular industry sectors, such as technology or defense industries.
  1. Target Date Funds. These funds are also referred to as lifecycle funds. They frequently include bond and stock instruments of which asset mix changes as the person approaches a specific date. An investor might select a target date fund to coincide with specific dates or events in a retirement plan for instance.

How to Invest in Mutual Funds

Mutual fund shares are typically purchased or sold directly through the financial companies that form the funds or through advisors and brokers that have a relationship with them. An investor who is interested in purchasing shares of any specific fund should review the fund’s prospectus, including information about the fund’s objectives, any fees applied for management or performance, as well as the background and qualifications of the fund’s managers if it is an active fund. A fee-only financial advisor can help an investor navigate and understand the more technical aspects of a fund’s prospectus as well as the fees without conflict since they do not receive any compensation from the mutual fund company to recommend any of the products.

Herein lies a key difference between the fee-only advisors in Zoe’s network, and many of the non-fiduciary advisors and brokers you might encounter elsewhere. The advisors in Zoe’s network will not make any commission on trades or recommendations of securities, their only source of revenue is the money you agreed to pay for their advice.  However, there are financial advisors associated with big banks and brokerages or in some cases they might independent who will get a kickback for investing their clients assets into specific products. So be sure to check for hidden fees, and ask if there are any other sources outside of what you are paying them. If you have any hesitation or concern or don’t want to spend the time pre-vetting advisors make sure to reach out to Zoe where you can rest assured advisors are already pre-vetted.

In all cases, investors should remember that no mutual fund investment comes with an ironclad guarantee. There are market and business risks inherent in every opportunity. A fund’s volality and performance, however, should be taken into consideration holistically based on the agreed investment policy statement (IPS.)

Zoe Financial: Financial Advice for Modern Mutual Fund Investors

The planners in  Zoe Financial’s network are a dedicated group of financial professionals who see every client as an individual investor with unique financial needs and goals.  For more information, please see our website or call to schedule an appointment with a member of our team.  

Additional Resources:

    1. Mutual Funds.
    1. 25 Online Tools for Mutual Fund Investors.
  1. Mutual Funds.