What Are Mutual Funds?

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If you don’t know a whole lot about mutual funds, you may have heard of them because of your employer-sponsored retirement plan. But, beyond that, you might wonder what these funds are really all about.

Don’t worry - these funds might seem abstract or complicated, but they are actually simple.

In this post, we’ll gain a better understanding of what mutual funds are and how they can be a powerful wealth-building tool.

What Are Mutual Funds?

Mutual funds are investment vehicles in which a group of investors purchases shares. Fund managers carry out various tasks, such as selecting investments, trading, and rebalancing.

Each share in a mutual fund is split into pieces that invest in dozens or even thousands of publicly-traded companies. As those companies grow, so, too, does the value of the mutual fund.

Because mutual funds have fund managers who actively manage them, they often try to beat a given benchmark. This may be the S&P 500 or Dow Jones Industrial Average (DJI).

Essentially, the word “mutual” here means mutual benefit. All of the investors benefit as their money grows, and fund managers collect an expense ratio as compensation.

There are many different mutual funds, and most of the major brokerages have their own. And as mentioned earlier, your employer-sponsored retirement plan (if you have one) likely invests in these funds.

Mutual funds often come with lower fees and much lower minimums when compared to a human financial advisor.

Most mutual funds are broadly diversified and are a great wealth-building tool in the long run. Just be sure you know what your fees are.

If you have an employer-sponsored retirement plan and aren’t sure what your fees are, ask your benefits office for more information.

Types of Mutual Funds

Huh, you mean there is more than one type of mutual fund? As it turns out, there are.

But fear not, because that doesn’t make things much more complicated.

Those of us in wealth-building mode equate to mutual funds and stocks. But while mutual funds can contain stocks, they can also contain bonds and money market funds.

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Disclaimer: Before you throw out all other financial advice you’ve been given and dedicate your life to following my advice, please be aware that I am not a financial expert. I have never ...

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