“Mutual funds will bore you to wealth.”
-- Industry saying
In this chapter, you will
- Be introduced to the definition of a mutual fund, aka an investment company, and review the growth of the mutual fund industry
- Investigate major mutual fund share classes and how mutual funds charge their investors for the services of the mutual funds
- Explore the major mutual fund categories from the most risky to the least risky
- Compare and contrast active versus passive portfolio management of mutual fund assets
- Examine a few mutual fund families and concentrate on a sample mutual fund with decades of investing experience
By the end of this chapter, you should be able to
- Describe the various components, characteristics, benefits, advantages, and disadvantages of mutual funds
- Identify and describe the various ways in which mutual funds charge their investors for their services and explain the actual costs borne by the investor
- Outline the major mutual fund categories and their risk/return profiles
- Discuss the advantages and disadvantages of active versus passive portfolio management of mutual fund assets
- Identify a sampling of mutual fund families and the services available to mutual fund investors
- Describe the benefits of long-term, prudent, consistent mutual fund investing and the pitfalls of short-term, uniformed, impatient mutual fund investing
Mutual funds are truly Investments for the Masses. The probability is very high that at some time in your future, your employer will offer you an employer-sponsored retirement plan. That plan will almost assuredly have mutual funds as their primary investment vehicles. Your friends and family and co-workers will also likely be investing in mutual funds and they will need your help. As the Investment Guru for your family, friends, and colleagues, you need to know and understand mutual funds thoroughly. That includes knowing the major categories of mutual funds and the ways that investors are charged for mutual fund services. As you will see, both are complicated. You will help your family, friends, and colleagues. You will speak with authority. Dear Students, study hard and bring honor and glory to Southwestern Community College when you tell them where you learned everything you know!
- 2.1: Introduction to Mutual Funds
- What is a mutual fund? It's an investment company! It is an indirect investment where the mutual fund portfolio managers choose the stocks or bonds or other investment choices for us. Mutual funds are truly investments for the masses. With mutual funds, investors get two important benefits, professional money management and diversification.
- 2.2: Growth of the Mutual Fund Industry
- The mutual fund industry is immense. Mutual funds now hold more of investors' money than either commercial banks or life insurance companies. They are the nation's largest financial intermediary. There are powerful reasons for this that we will explore.
- 2.3: Advantages and Disadvantages of Mutual Funds
- No investment is perfect. Every investment has advantages and disadvantages. Mutual funds are no different. Let's explore the advantages and disadvantages of mutual funds.
- 2.4: Open-end, Closed-end, and Exchange-Traded Funds (ETFs)
- There are three major types of mutual funds, open-end mutual funds, closed-end mutual funds, and Exchange-Traded Funds, commonly referred to as ETFs. What are the differences between the three and which is best for me?
- 2.5: Regulation and Organization of Mutual Funds
- How are mutual funds regulated and organized? What protections are in place to safeguard investors' money?
- 2.6: Fees, Expenses, and Share Classes, Oh, My!
- One of the most misunderstood aspects of mutual funds are the fees. Investors mutual fund investors know that they are paying for the services of the mutual fund. They just don't understand how. We will dig deep into the fees, expenses, and share classes, oh, my!
- 2.7: Categories and Types of Mutual Funds
- We are going to try to do the undoable. We want to get our arms around the 800-pound gorilla that is the mutual fund industry. To do this, we are going to work through the broadest categories of mutual funds and their investment strategies. Wish us luck! We will need it.
- 2.8: The Great Debate ‒ Active Management versus Passive Management
- The past several years has seen great controversy over the value of active management in the mutual fund industry. Are the mutual fund investment managers who research, identify, choose, and monitor the investments in their mutual funds actually worth the high salaries they are paid? Let's explore the debate.
- 2.9: Mutual Fund Families and Fund Services
- "Choose a Family, not a Fund." This sound advice was given by Forbes in the mid-1990's. It still rings true today. Let's peruse a few of the mutual fund families as well as the important mutual fund services they provide.
- 2.10: A Sample Mutual Fund
- “Okay, So How Do I Pick a Mutual Fund?!” By now, you are most likely feeling quite overwhelmed, yes? You are not alone. Let's focus on a single mutual fund and identify the characteristics that distinguish a good potential choice.
- 2.S: Summary
- Congratulations ‒ You Have Finished Chapter 2 ‒ Mutual Funds: Investments for the Masses
Thumbnail: The Wedding Dance, By Pieter Brueghel the Elder, Detroit Institute of Arts