The Mutual Fund in Simple Terms

“Mutual fund” is a term that gets thrown around a lot when it comes to investing and retirement. If that’s a term you’re unfamiliar with, this article is for you.

On a basic level, a mutual fund is an investment tool where money from many people is pooled together to invest in a group of stocks, bonds, and other financial tools.^[1]

The money that is in a mutual fund is managed by a professional money manager. That person allocates the money in the mutual fund toward financial options that align with the mutual fund’s goals. These goals are outlined in what is called a prospectus. Reading a prospectus can help you get a sense of what that particular mutual fund is aiming to do with its funds.^[1]

A mutual fund’s performance is based on the portfolio of stocks, bonds, and other assets that make it up. If the parts of a mutual fund are doing well, then the mutual fund will do well. If the parts of a mutual fund are doing poorly, then the mutual fund will do poorly.^[1]

You might gain money from a mutual fund in 3 ways:

1. Income from dividends. Sometimes, the stocks in a mutual fund pay out dividends, and sometimes, these dividends are passed on to investors of the mutual fund.^[1]
2. When a mutual fund sells a security for a profit, those profits might be passed onto the investors of the fund.^[1]
3. Selling your shares in a mutual fund that has increased in share price.^[1]

There are many kinds of mutual funds. Some focus on stocks, some focus on bonds, some focus on indexes, and some focus on other things or some kind of blend.^[1] So it’s important to understand what your money is going toward! Not every mutual fund is built the same.

If you are interested in mutual funds as an investment option, one thing to keep in mind is that there can be many considerations when fitting them into a financial strategy. This article is only scratching the surface when it comes to planning to use mutual funds to meet your financial goals.

If you’re looking for someone to guide you through developing and managing your investment strategy, Click HERE to reach out to one of our professionals at SHP Financial today for a complimentary review of your finances. We can help you to understand a technical product like a mutual fund and help you to make informed decisions about where you want your finances to go.