Mutual Funds

Mutual funds are a simple and straightforward way to lower investment risks while still maximizing diversification. These investment options offer many advantages and can be a good choice for many types of investors.

  • Diversified portfolio

    Easily diversify your portfolio without having to manage numerous investments.
  • Flexible costs

    Pay one expense ratio, not hundreds, while still investing in multiple security options.
  • Lower risk

    Offset your risk across hundreds (or thousands) of securities.

What is a Mutual Fund?

A mutual fund is a pool of money collected from many different investors used to purchase an extensive portfolio of various securities.

With the ability to invest in hundreds or thousands of securities at once with a single mutual fund, this type of investment strategy is a practical and efficient way to build a diversified portfolio with pieces like bonds, stocks, and money market instruments.

Many investors choose this type of investment strategy because it has a low investment minimum and offers many benefits to building a diversified portfolio. If you were to build your own portfolio, creating the level of diversification inherent with a mutual fund would be expensive and complicated—but with a mutual fund, you can take advantage of economies at scale.

And because your money is spread out among different securities, there’s a lower risk involved with mutual funds.

How a mutual fund works

Mutual funds set their own list of included securities, which allows investors to choose a type of fund instead of a long list of individual stocks to invest in. Most mutual funds are managed by a portfolio manager who buys stocks and bonds on behalf of the investors, meaning individual investors don’t have to do much of the heavy lifting with a mutual fund. This is important because part of the investment itself involves the manager’s ability to make you money: choose your mutual fund and manager carefully.

The portfolio manager is in charge of the mutual fund’s performance and usually tries to outperform benchmarks like the S&P 500 or other commonly followed indexes. Because an individual actively manages most funds, there are usually a decent amount of fees involved in this type of investment.

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With a mutual fund, you’re essentially investing in a portfolio manager’s experience and expertise—not just the fund itself.

How Mutual Funds Pay Income

Mutual funds pay out investors in two ways: through dividends and capital gains. As an investor, you’re also considered to be a stakeholder, so the way you make money is similar to when you’re an investor in a business.

Dividends Capital gains
If your share earns a profit when the stock market closes every day, your mutual fund might pay you. These are usually paid quarterly. With dividends, you can either ask for a check or reinvest those shares back into the fund. If the investment is sold for a higher price than you originally paid for it, those gains might be distributed to you at the end of the year or paid out when you sell your investment. That’s why most investors tell you to buy low and sell high.

Types of Mutual Funds

You may have first heard of a mutual fund if you ever had a 401(k) through your employer. Most employer retirement plans utilize mutual funds because they’re pretty straightforward. That being said, there are many types of mutual funds you can invest in as a self-directed investor, with each having its own unique objectives and risks.

These investment objectives can vary from low-risk investments like commercial paper or treasury bills in a money market fund to capital appreciation with equity funds. Let’s compare mutual funds that are the most common:

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To understand the specific attributes of a mutual fund, read the fund prospectus, statement of additional information, and other fund documents.

Stocks vs. Mutual Funds

Stocks Mutual Funds
Individual Investment Investing in multiple assets
Active investment strategy Passive investment strategy
Self-managed Professionally managed
More concentrated More diversification benefits

ETFs vs. Mutual Funds

Exchange-Traded Funds Mutual Funds
Bought/sold through broker-dealers Bought/sold through multiple channels
Active trading Bought/sold once per day
Listed on stock exchanges Not listed on stock exchanges
Lower expense ratios Higher tax implications

Index Funds vs. Mutual Funds

Index Funds Mutual Funds
Looks to match investment of benchmark stock Looks to beat investment of benchmark stock
Investment mix is automated Actively managed by a portfolio manager
Lower expense ratio expected Higher expense ratio expected (due to active management)
More consistent returns Higher volatility on returns

Bonds vs. Mutual Funds

Bonds Mutual Funds
Traded in dollars Traded in shares
Fixed returns Mixed returns
Long-term investment strategy Can be short- or long-term
Fixed interest rates Rates fluctuate with market changes

How To Invest In Mutual Funds

We encourage our investors to do adequate research or contact a broker/financial advisor, attorney or CPA, to determine if and which types of mutual funds are an appropriate investment.

Once you have determined that a mutual fund is suitable for you, it can be purchased with your Self-Directed IRA or other retirement accounts at Mainstar Trust.

When you use a custodian like Mainstar Trust, you can still receive the benefits of a portfolio manager, who is still in charge of all trading decisions. The custodian simply tracks and holds the securities.

Click below to find out how to use a Mainstar Trust account to invest in a mutual fund.