Mutual Funds Explained

On the 53rd episode of the Retirement Explained show, I’m discussing Mutual Funds, what they are, why they’re important, and all of the in’s and out’s of this very popular investment vehicle.

If you’re like most people, you probably have mutual funds somewhere; whether in your 401(k) or in an IRA so you’ll love this episode whether you’re a do-it-yourselfer or you work with a financial advisor like me.

What is a Mutual Fund?

I like to think of a mutual fund as a basket of investments; and I like to use the metaphor of a basket of eggs (or apples) to describe how it works.

When you purchase shares of a mutual fund, you’re purchasing a basket of investments and, typically, there’s a person or team of persons that are making sure the investments in the basket are high quality.

Imagine if you had a basket of eggs or apples and there was someone there to check regularly if one of the eggs or apples had gone bad, and if it had, they would replace it with a good egg or apple.

It’s the same thing with the mutual fund, except eggs or apples, it’s stocks, bonds, or both.

Types of Mutual Funds

There are several different types of mutual funds. There are funds that invest primarily in stocks. There are those that invest primarily in bonds and other sources of stability and income. There are funds called ‘Asset Allocation or Balanced’ funds that invest in both stocks and bonds. And there are some specialized types of funds that invest in alternative investments and commodities, etc.

One of the most popular funds are called ‘Target Date Funds’. These are commonly seen in workplace 401(k) accounts (80% of 401(k) monies are invested in them) because you get diversification with one investment and it targets your retirement year and automatically gets safer every year. So it’s a really simple and easy way to invest!

-Brian