Mutual fund is a type of investment fund that is comprised of several kind of investments such as multiple stocks and even bonds. It can also just be a fund that is tied to or following an index such as the S&P 500. It is an example of diversified fund since your money is spread across different companies stocks, industries or other types of investments. It is also an example of an active investment since it is being managed by people who are being paid to do research and maximize the profit that the fund can achieve.
Since there are people assigned to manage the fund, there is a fee being charged on a periodic basis, usually yearly. This fee is a percentage of the value of the fund at the end of the year. So even if the fund loses money, you will still be charged the fee which increases your lose. When putting your money in a mutual fund, your hope is that the fund manager is good and can give you an average return per year that is above the performance of the index after the fee is deducted.
The advantage of Mutual Fund is that your money is diversified and you can choose what level of risks you can take. Since it’s managed by someone, you don’t need to spend so much time doing research and trying to maximize your profit. The trade-off is that there is a fee and if the fund manager is not good then you are better off putting your money in ETF which I will discuss in my next note.
So how do you know if a Mutual Fund manager is good or not? You can look at the historical performance of the Mutual Fund and compare it to a similar Index or ETF and check their average yearly return. Remember to deduct the yearly fee from the mutual fund returns when comparing since you won’t have that fee if you are managing your own investments.