Investing for Beginners – Mutual Funds
Investing for Beginners
– Mutual Funds
The easiest way to think about investing in mutual funds is like purchasing a more expensive but actively managed Exchange-Traded Fund (ETF) with the hopes that the individual or team managing the fund will outperform the market and you will get a higher than expected return on your money. A mutual fund, similar to an ETF, is essentially a large pool of stocks and bonds that are grouped together in a single investment portfolio where – rather than purchasing each investment separately – you can purchase a share in the specific mutual fund and have the benefit of owning a small portion of all of the stocks and bonds currently held. By investing in a mutual fund, you receive your return when the stocks and/or bonds within your mutual fund generate dividends/interest payments and when the mutual fund sells an asset for a gain – meaning that it was purchased for less than it was sold - which creates a capital gain distribution from the fund to you, the investor.
Funds – Super Easy Difficulty
is running these funds and how do they get paid? Mutual funds are managed by
licensed professionals – known as Fund Managers – who get paid a fixed percentage
based on how the fund performs over the year. Please note that these fund
managers still get paid even if the fund losses money. This is one of those
things that bothers a lot of investors. If these fund managers get paid a large
amount of money to run these funds even if they make or lose money, they should
also be affected if the fund loses money too. This is one of the issues of
mutual funds as they are run by fund managers who might not have the motivation
to keep the fund in the green (meaning that it makes a profit, rather, the lack
of fear of losing money provides them the opportunity to make high-risk, high
reward trades in the hopes that they can outperform the market and convince
others to invest their money with them. It is a known fact that most mutual funds,
some articles even say 90% of these actively managed funds, do not outperform the
market and therefore will actually cause you to make less money year over year
as the costs of the funds eat away at your profit.
mutual funds have the highest MER (Management Expense Ratio) reaching anywhere
from 1.4% to 2.9% of all of the money you invested in the mutual fund. Now this
might seem like a lot or a little depending on your understanding of how much
it costs to run these funds. To provide an example, if you were to invest
$100,000 in one of these funds, even if the fund were to not make you money – assuming
in this example that it doesn’t make or lose money and stays at $100,000 – at the end of the year your investment would
be worth $97,100. The MER of 2.9% would have cost you $2,900 for no improvement
in your investment and this would just be considered the cost of being allowed
to purchase shares in this specific mutual fund. To help provide further
clarity, if you have taken a look at my ETF blog post, you will note that some
ETFs have MERs of 0.06% which would only cost you $60 compared to a mutual fund
that would cost you $2,900 a year if you were to invest $100,000.
who is buying mutual funds when ETFs are so much cheaper? The people who
purchase mutual funds are the same individuals who have deep pockets with no
interest in the financial world, who prefer to just let someone else manage
their money without thinking of any alternatives as they could not be bothered
with researching investments themselves. Mutual funds also cater to people who
are older as they did not have the option of ETFs when they started investing
many years ago and prefer to stick with investment options and/or brokers that
they understand and trust even at the cost of a higher MER. Lastly, individuals
who are locked-in to their Employer Retirement plans that provide only mutual
funds as options to invest their money in are also forced to pay high MER costs
as there is no other option available to them.
the end of the day, if you truly want a passive form of investing where you do
absolutely nothing and just receive your dividend checks every quarter and you
do not mind paying a high premium through a high management expense ratio, than
mutual funds are the investment for you!
me know if you agree with everything above! Would you like me to add anything
else to this post? Let me know below!
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