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What is a Mutual Fund?

What is a Mutual Fund?

By Les Stephen 

Sometimes, in the financial world, we hear terms that are very familiar, but we are not exactly sure what they mean.  Over the years, I’ve found that “Mutual Fund” is defiantly one of those terms.  Nearly every time the subject comes up with a client it’s worth taking a moment to clarify what exactly it is.  Put quite simply, a Mutual Fund is a professionally managed investment fund that pools money from many investors to purchase securities.  After that formal and rather worthless definition, let’s try in the rest of this blog to do a little better.  Of course, in a blog, details are limited, but I at least want to answer the questions: “why it came about?” and “how does it work?”  You will also see why we often use them inside our client’s portfolios here at Rayhons Financial. 


Why it came about..

Years ago, the wealthy could buy individual stocks in many different companies to allow them to diversify in case one company was to fail.  It also gave them the ability to build wealth by sharing in the profits of multiple companies.  The problem for the regular person was that even one share of stock could be a week’s wages.  Having said that, with most challenges come amazing solutions.  In the 1920’s, we saw the introduction of a form of today’s Mutual Fund.  It could take smaller amounts of money from many individuals and pool them together to buy a diversified portfolio which consisted mainly of different stocks and bonds.  This allowed the regular Joe or Jane to “pool” their money with others and have the buying power to, not only buy stocks and bonds but, to buy enough to be very diversified.  After the 1929 Stock Market crash, along came the Securities and Exchange Commission in 1934 and later the Investment Company Act of 1940 to form regulations to make them safer investments.  This includes each company having to issue a “Prospectus” which details all aspects of the investment for the investor’s protection.  They have become very common today in most investment portfolios and as you know, if you have a 401k, you will have a list of them from which to pick.


How does it work..

As stated earlier, a Mutual Fund is basically pooled money that is used to purchase different securities such as Stocks and Bonds.  The average Mutual Fund has over 100 different securities which gives it tremendous diversification protection due to the loss of value of a single or even several of the positions within the fund.  The value of a Mutual Fund share or “Unit” is called its NAV or Net Asset Value.  This is the value of the underlying investments (all the Stocks, Bonds, Etc.) divided by all the outstanding Units (all the shares in the investment that have been issued by the company).  These values are calculated every trading day at the closing bell of the Stock Market. Today there are over 7000 mutual funds available with many different strategies and goals they are trying to achieve for their investors.  Some are extremely conservative with their focus on very slow and steady growth.  Some are very aggressive with the goal of maximum growth.  Most, however, are somewhere in the middle.  They can be focused on an industry, a certain size of company, an area of the world, etc.  The fund itself has Fund Managers which are in charge of picking the investments inside their Mutual Fund and are very vested in the success of their fund.  The fund itself is sometimes managed very differently by the fund managers themselves.  Some funds have a strategy of passive management of the underlying investments (Strategic style), and some are actively managed and make many changes over time (Tactical style).  Fees can vary greatly depending on the fund and if you are paying an upfront sales charge or an ongoing sales charge (A shares – C shares).   Fees can vary greatly depending on whether it’s Tactical or Strategic management, the management expenses and all the other costs of marketing and maintaining the fund.  


Mutual Funds matter..

As Financial Advisors you can see why we often utilize Mutual funds inside our clients’ portfolios.  In summary, they give you diversification with even small investment amounts, they are easy to buy and sell (liquid), they are professionally managed and there are many different types of funds to choose from.  

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial professional and should be read carefully before investing.

Please feel free to contact out office with further questions. If you are looking for a financial advisor team focused on your unique financial situation, communicates openly, and that puts you and your goals at the center of the relationship, call us at (480) 507-2425 or contact us online. We’d love to meet you.




The content in this article was prepared by the article’s author. Cetera Advisor Networks, LLC does not endorse its content, and the views expressed may not necessarily reflect those held by Cetera Advisor Networks, LLC.