Friday, June 3, 2011

The Feeling is Mutual

So you've read about why you should invest in stocks and the handy ETF security, but you're probably wondering what those mutual funds that you hear here about really are.  A mutual fund is a pool of money collected from investors and put into different stocks and other securities of different asset classes.  Sound familiar?  It should.  Mutual funds are very similar to the ETFs we just talked about.  However, instead of tracking a specific index, mutual funds are actively managed by money managers.  The main goal is to give smaller investors access to professionally managed, diversified portfolios which would be more difficult to create with a smaller amount of money.  By pooling together money from many people together, the fund makes it easier to invest it many securities.  However, students and investors should be aware of the fees that mutual funds have which often eliminate much of the gains you can make from such an investment.

Even for professionals, however, it is very difficult for them to make extraordinary gains when compared with a broadly diversified index such as the S&P 500.  This makes ETFs a little more attractive since the fees for such a passively managed fund is lower than for a mutual fund.  The benefits of a mutual fund is a higher return, depending on how reliable the manager is.  Seeing as how simply owning the S&P 500 already gives a solid base for stock returns, I don't see much need to invest in mutual funds, and most of the stuff I read about them is negative.  They do have a place in certain portfolios, though, so depending on your goals it may be worth it to consider them.

And like with bonds, mutual funds have ratings on them.  Morningstar is a company that gives mutual funds ratings out of five stars and show the style of a mutual fund (small, mid, large and value, blend, growth).  The risk with a mutual fund is also analyzed, showing the alpha, beta, mean return, r-sqaured, and some other statistics.  For those not familiar with these terms, I may return to them later to explain a bit more.  The key number to note when looking at any mutual fund, however, is the fees associated with investing in it.  Over the long-term, stocks generally do well as a whole so trying to get extraordinary gains off stocks by taking a lot of risk may not be the best strategy.

As always, make sure to do your research on any investment you make.  Read up on the mutual fund to make sure it is something appropriate for you.  Some well-known mutual fund companies include T. Rowe Price, Vanguard, Fidelity Investments, and Blackrock.  These companies often have various mutual fund offerings for investors with different goals.  Again, I personally stay away from mutual funds because of the fees, so my experience with them is limited.


  1. nice post, im still kinda confuse with the purpose of mutual funds, how does mutual funds and ETF relate? what you mean by diversified portfolios?

  2. Basically, the idea of having a diversified portfolio is so that you don't have all your eggs in one basket. For example, if you put all your money in oil companies and oil does really well, you will make a ton of money. However, if there is a sudden oil spill (like with BP), then your stocks will drop a ton and you will lose most of your investment. To prevent such high volatility, you want to diversify. So maybe put 1/5 of your money into oil companies, 1/5 into consumer products, 1/5 into technology, etc. ETFs and mutual funds both are baskets so when you invest in them, you are usually getting a variety of stocks, not just one. Mutual funds have higher fees though since they are actively managed; you are basically paying a little bit extra for the "expertise" of some fund manager.

  3. ah many thanks, that makes sense, for the portfolio part, i guess was trying to ask what it was, but i'm guess its the set or variety of stocks you choose to get.