Mutual Funds 101

By Brian McGlinchey

The financial world can be full of jargon and clunky terms that seem designed to keep you confused and discouraged about your ability to learn more about finance. But spending a little time reading about different topics can motivate you to take charge of your money.

Take mutual funds, for instance. You’ve heard of them, but what are they, exactly, and why are they beneficial? 

A mutual fund is a company that pools the money of many investors and invests it in a variety of securities, such as stocks or bonds, according to specific objectives. When you invest in a mutual fund, you’re essentially buying a share (or shares) of the fund. So, for example, if you invest $500 in a mutual fund that costs $50 per share, then you own 10 shares. 

What Are the Advantages of a Mutual Fund?

Mutual funds are considered investment vehicles that can help you reach big goals like retirement, college and dream homes. They can be aggressive (stock funds) or conservative (money market funds) and owe their huge appeal to three key factors:

  • DIVERSIFICATION. That’s Wall Street’s way of saying “Don’t put all your eggs in one basket.” Because some mutual funds can contain hundreds of different stocks and bonds, your risk of taking a huge loss in one fell swoop may be potentially reduced with this type of fund. When one stock is down, for example, another might be up. 
  • PROFESSIONAL MANAGEMENT. While you’re busy making a living, a professional fund manager is working to figure out which stocks and bonds to buy (or sell) with your money and how to make the mutual fund profitable.
  • EASY IN, EASY OUT. Unlike many other investments, such as real estate, it’s generally easy to move money in and out of mutual funds. And it doesn’t take much to get started.

What’s the Downside of Mutual Funds?

Mutual funds can be great investment tools. But before you act, consider these characteristics:

  • TAXES. Uncle Sam will share in your investment profits. You can invest in taxable accounts, where you pay taxes on earnings as you go, but you can also use a tax-advantaged account like an IRA or a 401(k). These accounts come in traditional and Roth flavors: Traditional accounts may let you deduct or partially deduct contributions from reported income, but you pay tax on any growth at withdrawal. With the Roth option, you forgo the deduction today so any growth is tax-free at withdrawal.
  • EXPENSES. All mutual funds charge fees to cover fund managers’ salaries and operating costs. Some also charge 12b-1 fees for advertising and marketing, and that fee can appear or disappear depending on whether you purchase directly with the issuing financial institution or through a third party. And many have sales charges, known as loads, to compensate brokerage firms and salespeople.
  • RISK. Investing always involves some level of risk, meaning you may lose money, including your principal (the original amount you invested to begin with). But if you’re able to bear the ups and downs of the markets, your potential for profit may be greater. When deciding which mutual fund to choose, look at how it performed when the market was strong (a bull market) and weak (a bear market). Then, make sure you can stomach the ride. Remember: While past performance is no guarantee of future results, it will give you an indication of how risky the investment is to help you decide if you can handle the volatility.

Some mutual funds are made up of a mix of stocks and bonds. Here’s more info about these underlying assets so you have a better idea of why or how mutual funds are calibrated to achieve a certain goal:

STOCKS

Stocks are a way of owning a piece of a company. Those pieces, called shares, are bought and sold every business day by millions of investors. If the company makes a profit, it may share the wealth by paying you via a dividend. You can also make money by selling your shares for more than you paid for them.  

BONDS

Bonds are a way of loaning money to a company or to the government. You earn interest for a certain period of time, and the loan is repaid when the company or government gives you your money back. Bonds are generally more stable than stocks in that their price generally does not fluctuate as much, but hopefully leads to stable growth.

WHERE DO YOU BUY A MUTUAL FUND?

Ready to get your investment plan on track? Email info@usaa.com or call 800-531-USAA (8722) to work with a USAA financial advisor to customize a plan to reach your financial goals.

  


 

Investing in securities products involves risk, including possible loss of principal. 

This material is for informational purposes only and is subject to change at any time due to market or economic conditions.  

The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. 

Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income. 

Some mutual funds may require differing initial minimum investment.  

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. 

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates. 

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