Introduction to Mutual Funds

What is a Mutual Fund Is when investor’s get together, pool their money and ask a company to manage it for them. This fund is managed by a portfolio manager who works for a company. (This can be a bank or an investment company)

A Short Video Mutual Funds Explained

Some Vocabulary Instead of buying a share of a mutual fund, we buy a unit of it. AMC- Asset Management Company (this is the company who makes the investment decisions for the fund) NAV – Net Asset Value. What one unit of the fund is worth. “Load” – speaks to the fees associated with buying or selling a mutual fund.

The “Pros” An “expert” is making investment decisions for you. You do not need to watch the stock market daily. Dividend Reinvestment. Any dividends issued from the stocks in your portfolio will allow you to buy additional shares of the fund. This can help your investment grow faster.

Pros continued 3. Reduced Risk. Your portfolio can be diversified even if you don’t have a lot of money. 4. Convenience and Fair Pricing. Mutual funds are readily available (most banks offer them). They are traded only once per day, so you don’t need to worry about watching the market during the day for the price (NAV) to drop to a certain level.

The “Cons” 1. High Expense Ratios and Sales Fees Management Expense Ratio (MER) This is especially true with “load” mutual funds. This is an extra fee that the company can charge for selling your units. “No-load” funds exist, but you often have to invest for longer periods of time.

Cons continued 2. Management Abuses. You do not have control over when stocks/bonds are traded. You are trusting the fund manager implicitly. 3. Tax Inefficiency. You cannot control when capital gains are declared because you do not control when underlying assets are sold.

Cons continued 4. Poor Trade Execution. Mutual funds are traded once per day and the price is based on the NAV (found on the globe investor site). Day trading or timing the market is not possible here.