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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 What is a Mutual Fund?

What is a Mutual Fund?

A mutual fund is a collection of stocks and / or bonds which are professionally managed for the benefit of investors in them. Mutual funds exist because individual investors generally don’t have enough money to properly diversify a portfolio. 12 shares of Coca Cola, 18 shares of Disney, 32 shares of GE, etc are very expensive to buy individually. A professional money manager aggregates lots of small time buyers into a big fat pot of money which then effectively gets “volume discounts” for the purchases and sales of shares.

Mutual funds are usually sold with a “load” and a fee for managing the fund. There is a fabulous myth marketed aggressively to retail buyers that consumers get a great deal on “no load: funds. (Load is a fancy term for one of the best pitchers in baseball history and for “commission”.) Traditionally mutual funds were sold through brokers who charged between 1.5 and 7% commission usually depending on the size of the purchase and the perceived “quality” or track record of the fund. Mutual funds were in the business of managing money, not selling it so they were happy with their roles as buyers and sellers of stocks and bonds and they let brokers broker.

Then brokers got into the mutual fund business for a variety of reasons, mainly because they thought they could make money doing it. But there was a hole in the market because many mutual funds underperformed indexes – in theory, more than half anyway – and brokers felt they had leverage.

Mutual funds fought back – think: Star Wars with geeks in glasses fighting with pens – and began to broker their own funds. Fidelity was the most successful of funds becoming “supermarkets” of financial services. Schwab was the most successful broker who went into the funds businesses and/or wholesaled other funds.

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