Smart Mutual Fund Investing In Today's Volatile Market

Mutual funds are a popular investment tool for both individual and professional investors. They are a type of investment fund that pools money from many participants to purchase a diverse portfolio of stocks, bonds, and other securities. This diversification helps to lower risk and boost returns. Mutual funds typically trade once per day and are often owned as part of a defined contribution retirement plan. There are currently over 9,000 mutual funds holding more than $16 trillion in assets. When choosing a mutual fund to invest in, it is important to consider factors such as fees, investment goals, risk tolerance, and the fund's track record.

Mutual funds vs. stocks

Mutual funds and stocks are both popular types of investments, allowing investors to build portfolios and grow their wealth. However, there are some key differences between the two that can help you decide which option is best for you.

Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of securities. Each fund usually has an investment objective that states how the fund will invest, based on factors such as industry, region, or asset type. Mutual funds are typically actively or passively managed by professional portfolio managers, who buy and sell securities with the goal of meeting or beating the performance of a specific benchmark.

On the other hand, stocks represent shares of ownership in a specific company. When an individual buys a stock, they are purchasing a small portion of that company and becoming a shareholder. The value of stocks fluctuates based on the company's performance and market conditions, and shareholders benefit when the company performs well.

Now, let's compare the two and outline some of the pros and cons of each.

Mutual Funds:

Pros:

• Risk is spread out by investing in multiple companies as part of a diversified fund.
• Financial professionals choose which stocks are included in the fund and manage it, saving you time and effort.
• Instant diversification, meaning lower risk.
• Can be low cost, especially passively managed index funds.

Cons:

• If a single stock performs exceptionally well, you may miss out on high growth as it will be diluted by other stocks in the fund.
• Investors give up some control to the fund managers.
• Some funds have minimum investment rules and holding periods.
• May underperform the market if actively managed.

Stocks:

Pros:

• You have control over which stocks you invest in.
• Potential for large gains if a stock performs well.
• Easy and low-cost to trade through online brokers.

Cons:

• Potential for large losses if a stock performs poorly.
• Time-consuming and stressful to monitor and research individual stocks.
• Brokerage fees may be charged for each trade.

The choice between mutual funds and stocks depends on your investment goals, time horizon, and risk tolerance. Mutual funds offer instant diversification and are managed by professionals, making them a good option for those who want to participate in the stock market without the hassle of picking and monitoring individual stocks. Stocks, on the other hand, offer higher potential returns but come with higher risk and volatility.

Additionally, it's important to consider the fees associated with each option. Both mutual funds and stocks have fees and expenses that can affect investment returns. Mutual funds typically charge management fees, while stocks may incur brokerage fees for each trade.

Mutual funds vs. ETFs

Mutual funds and ETFs (exchange-traded funds) are similar in that they are both managed "baskets" or "pools" of individual securities, such as stocks and bonds, that offer exposure to a wide variety of asset classes and niche markets. They are also both overseen by professional portfolio managers. However, there are some key differences between the two.

Management

While both can be actively or passively managed, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds, on the other hand, come in both active and indexed varieties, but most are actively managed.

Trading

ETFs trade like stocks and are bought and sold on a stock exchange, with prices changing throughout the day. Mutual funds, on the other hand, are traded only once per day, with all investors receiving the same price.

Minimum Investment

ETFs do not require a minimum initial investment and are purchased as whole shares. Mutual funds, on the other hand, usually have a flat dollar amount as a minimum initial investment and can be purchased in fractional shares or fixed dollar amounts.

Costs

ETFs have implicit and explicit costs, including trading commissions and operating expense ratios. Mutual funds can be purchased without trading commissions but may carry other fees, such as sales loads or early redemption fees.

Tax Efficiency

ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings. A sale of securities within a mutual fund may trigger capital gains for shareholders, even if they have an unrealized loss on the overall investment.

Whether you choose an ETF or a mutual fund depends on your goals and investment style. Consider an ETF if you want to make intraday trades, use specific order types, or if tax efficiency is important to you. Consider a mutual fund if you invest frequently, want to repeat specific transactions automatically, or are looking for a fund that could potentially beat the market.

Mutual fund fees

Annual Fund Operating Expenses

These are ongoing fees that cover the cost of paying fund managers, accountants, legal fees, marketing, and other administrative costs. They are typically between 0.25% and 1% of your investment in the fund per year and can be found in the fund's prospectus under "Annual Fund Operating Expenses". Examples include:

• Management fees
• 12b-1 fees (capped at 1%)
• Other expenses, such as custodial, legal, accounting, and transfer agent expenses

Shareholder Fees

These are sales commissions and other one-time costs incurred when buying or selling mutual fund shares. They are typically charged as a percentage of the amount invested in the fund and can be found in the fund's prospectus under "Shareholder Fees". Examples include:

• Sales loads (front-end or back-end)
• Redemption fees
• Exchange fees
• Account fees
• Purchase fees

It's important to carefully review the prospectus and understand all the fees associated with a mutual fund before investing. Even small differences in fees can significantly impact your investment returns over time.

Mutual fund diversification

Mutual funds are a popular investment tool for those seeking to beat the market or simply access a wide range of investments. They are also an excellent source of diversification for investors' portfolios.

Diversification is a strategy of spreading your money across different types of investments, reducing risk while allowing your money to grow. It is one of the most basic principles of investing and can be achieved through investing in mutual funds.

Mutual funds are already naturally diversified. They are investment funds that are broadly invested across multiple sectors, assets, and/or geographic regions. They hold a wide range of securities, often in multiple asset classes, to prevent events in one area from affecting an entire portfolio.

There are four types of mutual funds that can help diversify your portfolio:

• Growth and Income: These funds invest in large and established companies, such as Apple, Home Depot, and Walmart. They are also called large-cap funds as the companies are valued at $10 billion or more.
• Growth: These funds are made up of stocks from mid-cap companies valued between $2 billion and $10 billion.
• Aggressive Growth: These funds have the highest risk but also the highest potential financial reward. They are often referred to as "small-cap" and are valued at less than $2 billion, possibly still in the startup phase.
• International: These funds are made up of stocks from companies around the world and outside your home country.

By investing in these four types of funds, you can spread your money evenly and balance out any losses. This gives you protection against losses as you never know which stocks will go up or down.

Additionally, there are three steps to diversifying your mutual fund portfolio:

• Choose your account: Look into your 401(k) or 403(b) at work to see what mutual fund options are available. These accounts offer tax breaks and can be automated through payroll deduction, and your employer may offer a match. If these options are not available, a Roth IRA through an investment group or broker is a good alternative.
• Diversify through cap sizes and international funds: Once you've chosen an account, explore the different fund options available to you. Spread your investments across the four types of mutual funds mentioned above to achieve a balanced portfolio.
• Meet with your investment professional to rebalance as needed: The market is constantly changing, so the values of your funds will also fluctuate. Meet regularly with your investment professional to rebalance your portfolio and make any necessary adjustments to maintain your desired allocation.

It is important to remember that diversification does not guarantee a profit or ensure against loss. However, it is a strategy to help manage and reduce risk while investing.

Mutual fund performance

Mutual funds are among the most popular investing tools for both individual and professional investors. They are a good option for those who want to beat the market or simply access a broad range of investments.

There are a few key considerations when it comes to mutual fund performance:

Fees and Expenses

Mutual fund expenses have been declining due to increased competition from lower-cost ETFs. In 2016, expense ratios averaged 0.63%, compared to 1.04% in 1996. However, some funds levy additional management fees or sales charges, so it's important for buyers to be aware of all costs before purchasing.

Active vs Passive Management

Most mutual funds are actively managed, meaning fund managers follow an investment strategy to buy and sell securities in an attempt to beat the market. However, some funds are index funds, which aim to track the performance of a specific market index.

Diversification

Mutual funds offer diversification by allowing investors to own a broad range of securities in various assets, including equities, bonds, real estate, and commodities. This helps to lower risk and potentially boost returns.

Performance

When evaluating mutual fund performance, it's important to look at both short-term and long-term returns. While past performance doesn't predict future results, it can give an indication of the fund's volatility and stability. It's also important to compare the fund's performance to relevant benchmarks or similar funds to assess how well it has performed relative to its peers.

• Fidelity International Index Fund (FSPSX)
• Fidelity U.S. Sustainability Index Fund (FITLX)
• Schwab S&P 500 Index Fund (SWPPX)
• Shelton Nasdaq-100 Index Fund Investor (NASDX)
• Schwab Fundamental US Large Company Index Fund (SFLNX)
• Dodge & Cox Income Fund (DODIX)
• Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

When considering which mutual fund to invest in, it's important to evaluate your financial goals, risk tolerance, and the fund's performance, fees, and investment strategy.

Frequently asked questions