Nov 21, 2017 Finance

Okay, Seriously—Does Anyone Actually Know What a Mutual Fund Is?

by Christie Calucchia

When it comes to your finances, do you take a head-on or head-in-the-sand approach? If you identify with the latter, the good news is you’re not alone. The bad news? You’re not alone. New data suggests that when it comes to managing money, women are not as independent as you’d expect. In fact, 91% of women in heterosexual couples are not participating in financial decisions. But we want to change that statistic. Enter our finance series, The Paper Files, where we uncover tricks and tips that will help you manage your money and your future. Ready to take it head-on?

PHOTO:

Brooke Testoni

The idea of investing money can seem somewhat confusing or intimidating if you aren’t in the know. It’s the kind of venture that many brush off as something for smarter, wealthier, or more financially literate individuals to take on. However, it doesn’t have to be this way. Starting anything new and unknown can be frightening, but if you arm yourself with information, even a topic as confusing as investment banking becomes more attainable.

Enter financial advisor Kristin O’Keefe Merrick, the woman behind O’Keeffe Financial Partners, LLC. She worked on Wall Street for 15 years before starting her own financial advising firm, and she’s about to explain one of your most puzzling financial questions: What is a mutual fund? Understanding this concept may be just what you need to kick-start your investing endeavors. O’Keefe Merrick will guide you through the basics, from stocks and bonds to how much money you’ll need to make your first investment. Ready to take on Wall Street? Here’s everything you ever wanted to know about mutual funds.

The first step to buying a mutual fund is understanding what exactly that means and where your money will go. “A mutual fund is an investment vehicle that is composed of a pool of money collected by many investors for the purpose of investing in a portfolio of securities,” she explains. These securities can be stocks, bonds, or money market instruments, for example. After you buy a mutual fund, portfolio managers make investment decisions for you. “They attempt to produce capital gains and/or income for the fund’s investors.” Basically, you’ll hand your money off to a professional to make all the tough choices for you.

According to O’Keefe Merrick, mutual funds are just a combination of stock and/or bonds. “Think of a mutual fund as a basket of securities,” she says. There are literally thousands of these mutual funds, all with their own investment objective. “Each mutual fund has its own risk profile, securities make-up, time horizon, performance history, and yield,” she explains. To put it simply, you’ll want to do your research before deciding which specific mutual fund to invest in based on what it’s composed of (stock, bonds, or a combination of the two) and different mandates placed on it.

When it comes to deciding where to invest your hard-earned cash, O’Keefe Merrick advises turning to the professionals. “There are thousands of mutual funds out there, and some are much better than others.” She also suggests having an idea of what your risk profile and timeline are. “If you are investing for the longer-term, you may want to take more risk. If this is a short-term investment, you may want to purchase something with lower risk.” You’ll also want to be prepared to invest at least $1000, as this is generally the minimum amount required to buy a mutual fund.

It should come as no surprise that making an investment is a risk. “You should always be prepared for the mutual fund, or any security you own, to go down in value,” she warns. There are also many costs, fees, and taxable consequences associated with mutual funds that are often forgotten about. “Running a mutual fund is an expensive undertaking and those costs are passed along to shareholders,” she says. As a shareholder, it’s important to understand any underlying and upfront costs of owning a mutual fund. “If you are investing your taxable (non-qualified) money in mutual funds, you should understand that it might not be the most tax-efficient way to invest.” This is where a professional advisor may come into play in order to help you understand what kind of investment is best for you.

The best part about buying a mutual fund is that most of the work is done for you by a team of professionals. Investing in these funds also offers you diversification, which O’Keefe Merrick explains as the ability “to not put all your eggs in one basket.” Basically, your risk will be spread out among the many underlying securities owned by your mutual fund. “The more stocks and bonds you won, the less any one of them can hurt your portfolio if it were to fall in value,” she explains. You can also garner diversification to multiple sectors in the market by buying several different kinds of funds. Lastly, because mutual funds are subject to industry regulations, they are very transparent, ensuring you and other investors accountability and fairness, according to O’Keefe Merrick.

Kristin O’Keeffe Merrick is a Financial Advisor at O’Keeffe Financial Partners, LLC. 100 Passaic Ave, Suite 100A, Fairfield, NJ 07004, 973-227-3660. Views expressed are the current opinion of Kristin Merrick. O'Keeffe Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Raymond James is not affiliated with My Domaine.

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