Mutual funds are some of the most common passive investment instruments. Here is everything you need to know about investing in mutual funds. What is a mutual fund and how you can take advantage of this type of stock investing

 

Quick facts

  • In recent years, the amount of money invested in passive investments has been on the rise. In 2018, investors moved more than $470 billion to passive investment vehicles like mutual funds and ETFs.
  • In total, passive investment vehicles like mutual funds account for more than 45% of all equity assets. Part of the reason for this is that most investors have become concerned about the exorbitant fees charged by money managers and the common track record of underperformance.

How to Invest in Mutual Funds

There are only a small number of easy steps you need to follow when investing in mutual funds.

  1. Decide on the type of mutual funds that you want to invest in. The best way to do this is to go to the company’s website and look at the best-yielding funds.
  2. Deposit funds to your broker and purchase the mutual fund. Some of the most popular brokers are companies like Robinhood, Fidelity, eTrade, and Schwab.
  3. You can also buy the mutual funds from the companies that offer them like T. Rowe Price and Vanguard.

Mutual funds create more wealth by pooling money from many investors and investing in a collection of bonds, stocks, and other securities that may be difficult to get by individually.

What is a Mutual Fund?

As an investor, you can create a personal portfolio by taking your money and buying a set of stocks. Obviously, since you don’t have a lot of money, your portfolio will be limited. Mutual funds solve this by pooling money from many investors and investing in a collection of bonds, stocks, and other securities that might be difficult to assemble individually.

The collection of assets assembled is usually known as a portfolio while the price of the mutual fund is known as its net asset value (NAV). The NAV is determined by adding the total value of the assets held in the portfolio divided by the outstanding shares. When the money is pooled together, the responsibility of managing the portfolio is left to the portfolio manager and his team of analysts.

 

While the concept of mutual funds is more than a century old, it was widely promoted by John Bogle, who founded Vanguard in the 1970s. Today, the company he founded has more than $6 trillion worth of assets. It has more than 20 million customers. In his 2017 letter, Warren Buffet praised Bogle for doing the most for American investors than anyone else.

Mutual funds are a professionally managed investment fund that unites money money from many investors. Mutual funds have been popularized by the late Jack Bogle, the founder of Vanguard. This company has more than $6 trillion in assets under management. There are many mutual funds to choose from if you want to consider Mutual Funds.

Benefits of Investing in a Mutual Fund

There are many benefits you can gain by investing in mutual funds. These are:

  1. Mutual funds provide a cheap way to have a diversified portfolio.
  2. Advanced portfolio management because most mutual funds employ experienced portfolio managers.
  3. Dividends paid by the constituent companies is reinvested in the fund.
  4. Easy to buy and easy to understand.
  5. Economies of scale in transaction costs.
  6. Mutual funds are highly liquid financial assets.

Reasons why to choose mutual funds:

  • Investing in mutual funds enables you to have a professional money manager invest for you.
  • Another advantage is that each fund is made up of many companies, which enables you to be diversified.
  • Third, because of the economies of scale, the transaction costs in mutual funds is significantly lower than in other forms of investments.
  • Fourth, with mutual funds, you can exit your investment at any time.

Which Are the Biggest Mutual Fund Companies?

The mutual fund industry has more than $18 trillion in assets under management. As such, the industry is usually controlled by a few companies that have thousands of employees and millions of customers. Some of the biggest companies in the industry are PIMCO, Dimensional Funds, Nuveen, Blackrock, Vanguard, Fidelity, JP Morgan, and T. Rowe Price among others.

Types of Mutual Funds

There are many types of mutual funds. However, broadly, there are four main ones. These are:

1. Equity Funds

These are funds that invest in common stocks. There are other types of these funds. Based on the company size, they are divided into large-cap funds, mid-cap funds, and small-cap funds. These invests in companies with a market cap of more than $10 billion, between $2 to $10 billion, and those worth below $1 billion. Mutual funds can also be categorized according to the sectors they operate in. Examples of these are technology, finance, consumer, energy, and real estate among others.

Others invest according to the growth or the state the companies are in. Growth funds invest in relatively new companies that are growing fast while income-focused funds invest in those that generate high yields. Equity funds are also categorized in terms of location. Emerging market funds invest in companies from the emerging market countries like Brazil and Turkey while frontier funds invest in companies in the developing countries like Kenya and Uganda. Developed market funds invest in companies in the developed countries like United States and Germany.

2. Bond Funds

These are mutual funds that invest in government, corporate, and municipal bonds. Examples of these mutual funds are the PGIM High Yield Fund, T. Rowe Price Institutional High Yield Fund, and Federated Institutional High Yield Bond Funds.

3. Money Market Funds

These are fixed income mutual funds that invest in high-quality short term debt from the government, corporations, and municipals. These funds are some of the safest mutual funds and account for 15% of the whole industry. Example of these are the Vanguard Prime Money Market Fund and the PIMCOs Government Money Market Fund.

4. Balanced Funds

These finds allocate part of the funds to stocks and others to bonds. In most cases, the ratio of the two is usually 60% stocks and 40% bonds. Examples of these funds are: Vanguard STAR, Vanguard Balanced Index, and T. Rowe Price Capital Appreciation fund.

What are the Taxes Payable for Mutual Funds?

There are three common taxes that you are required to pay from your mutual funds gains. These taxes are:

  • Dividend income. This is the amount that is generated from the dividends the companies pay. It is usually taxed at the ordinary income tax rate.
  • Capital gains tax from sale of securities. This is a tax that can be taxed at your normal tax rate. It can also be taxed at a more favorable long-term capital gains tax depending on how long you have held the fund.
  • Capital gains when you sell or exchange shares of the fund at a profit.

What Fees are Charged in Mutual Funds?

As with stocks, there are costs associated with owning mutual funds. The most common of these charges are:

  • Loads. These are transaction charges for buying and selling stocks.
  • Redemption fee. This is a fee charged when you sell the shares you have owned for a short time.
  • Ongoing expenses. These are fees that cover the expenses of running the fund.
mutual funds

Mutual funds have a lot of benefits but as an investor there are a number of steps you need to follow when investing in mutual funds.

How to Invest in Mutual Funds

As an investor, there are only a small number of easy steps you need to follow when investing in mutual funds.

  1. Decide on the type of mutual funds that you want to invest in. The best way to do this is to go to the company’s website and look at the best-yielding funds.
  2. Deposit funds to your broker and purchase the mutual fund. Some of the most popular brokers are companies like Robinhood, Fidelity, eTrade, and Schwab.
  3. You can also buy the mutual funds from the companies that offer them like T. Rowe Price and Vanguard.

Final Thoughts on Mutual Funds

Mutual Funds are an excellent way to invest in the financial market. They offer low fees and offer you a diversified way of investing in the market. As an investor, we recommend that you only invest in mutual funds for long-term investments such as retirement. We also recommend that you create a portfolio of mutual fund accounts that is diversified across multiple assets and industries. Diversified portfolios are more robust and are known to generate more wealth across time.

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