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Financial Literacy

Financial Literacy

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Mutual Funds

Recap: stocks are a little bit of ownership of a company and bonds are a little bit of a company's debt.

Now, you can buy those suckers individually, or you can choose a bunch of them in a mutual fund. Mutual funds are professionally managed groups of stocks and bonds, and they let you buy a diversity of shares without a huge bill.

If you were to buy 12 shares of Google, 18 shares of Coca Cola, 15 shares of General Motors, and a bunch of other shares, you'd get a nicely diversified investment. If the tech—or, uh, soda—sector suddenly started to go bad, you wouldn't have heart palpitations when checking your investments. Unfortunately, buying all those individual stocks would also cost you a ton of money and a ton of time.

Mutual funds take care of these problems.

A professional money manager chooses a bunch of stocks and bonds for you, so you don't have to wade through spreadsheets comparing companies. Since managers combine a bunch of small-potatoes investors like you into one big investment opportunity, they get a "volume discount" so that your new portfolio is affordable.

And who doesn't love a bargain?

Money for Nothing? The Costs of Mutual Funds

Mutual funds aren't free.

There's a fee for managing the fund that you'll have to pay along with a "load" (a sneaky word for "commission"). There are "no load" funds, but you'll still end up paying for them one way or another. Money managers need to pay for their fancy lunches somehow, you know.

Traditionally, mutual funds were sold through brokers, who charged between 1.7 and 7 percent commission. How much you paid was based on the track record of the fund, how much you paid into the fund, and how much the brokers thought they could get away with charging.

Then, mutual funds hit something of a wardrobe malfunction. While brokers were busy convincing buyers that mutual funds were a great buy, newspapers and cold, hard facts (they ruin all the fun, don't they?) showed that mutual funds didn't do as well as indexes. Mutual funds decided to up the ante and broker their own funds (rather than leaving it to money managers).

A bunch of brokers began to offer wide ranging financial services, including wholesaling of funds. Their promise was that they knew money better and could get investors better returns. Fact? Fiction? The jury's still out on that one, but these services sure became popular. Heard of Fidelity or Schwab? Those are your guys.

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