Mutual funds are in some ways investment no-brainers. When you buy into a particular mutual fund, you get a whole basket of companies/stocks, bonds, depending on the kind of mutual fund you invest in. That’s what mutual funds are: baskets of stocks, which are purchased and owned by a pool of investors, and then managed by a mutual fund company.
Each mutual fund within a particular company has a fund manager (or managers) whose job it is to do research, find new stocks to buy, sell stocks not wanted anymore, and generally make his or her investors money.
At the end of every market day, the mutual fund has a NAV, net asset value, which is the value of the total portfolio of the mutual fund divided by the number of shares outstanding in that fund. If at the end of the market transactions on a given day, your mutual fund has, for example, a NAV of $13.50, this means you could expect to sell it or buy it for that amount. Of course, there are some other factors complicating this truth, but we won’t go into them here! (i.e., if the fund charges a fee (called “loaded”) for each dollar you use to purchase shares, the purchase amount is automatically different — and by “different” I mean less.)
Back in 1924, when Massachusetts Investors Trust became the first traded mutual fund, life was simpler. You had very few choices if you wanted to be in a mutual fund rather than in individual stocks. In fact, in 1924 you had only one choice!
Today there are more than 8,600 mutual funds to choose from, which makes the choosing much more complicated. There are different kinds of mutual funds: equity, income, global, bond, closed-end, and on and on. In fact, the mutual fund world has rapidly become more complicated than the stock world. In the stock world, you do some research, listen to that hot tip, and go to your broker – either by phone or online – to buy however many shares of XYZ Company you can afford. Easy. Then you just sit back and watch the stock appreciate in value, sell when you want (via the same brokerage where you bought the stock), and count your profit!
With mutual funds, there are all kinds of complications: first, which family of funds do you want to go with? Vanguard? Fidelity? Then, which kind of mutual fund do you want? Equity (stocks only); balanced (stocks and bonds); growth (stocks that should get bigger and better); income (stocks that pay dividends); particular sectors of the market, global, international, and many other preliminary choices.
Then, do you want small capitalization, mid-cap, or large cap, which is another way of saying: “how big do you want the companies in your mutual fund portfolio to be?” Do you want the GE’s and Chevrons of the world, or are you more hopeful that there are small companies out there, which can become the next Microsoft — and you’ll then be in on the ground floor?
And oh, there’s yet another category of mutual funds to consider: Class A, Class B, Class C. (Are you totally confused by now? Hang in there!)
Classes of mutual funds primarily refer to how you will pay for the fund (up front, when you sell, or whenever you buy more shares) and how much the company or person selling you the fund will be paid. Be sure to do your homework before you buy a particular class to see all fees involved and whether it’s in line with your investment strategies. Depending on the length of time you will hold the mutual fund and how you will buy more shares, if at all, influences which class is better for you.
Whenever anyone tries to sell you a mutual fund, you should always ask which Class you are buying into, because “class matters.”
In articles to come, we’ll explore this interesting question: is it better to own mutual funds or individual stocks? We’ll see that there is no easy answer, but that there are definite pros and cons to owning either kind of investment.