NOTE: This column is sponsored by Powercat Financial Counseling
Although graduation often seems so far away, many students will hit the ground running in the work force as soon as they leave college. As you begin to think about the future, it’s important to know how to wisely save and invest your money in order to pay down student loans and make life-changing purchases like a new home. Mutual funds are one tool in your investment belt you might want to know more about.
What is a mutual fund?
A mutual fund is a pool of investors in a “basket” of stocks and bonds. In other words, instead of you investing in one stock or bond, you combine your money with several others to collectively invest in many stocks and bonds.
Mutual funds work like stocks in that the money you invest goes into the portfolio, and you receive shares of interest in the fund. A professional fund manager is in charge of investing the fund.
Some businesses use mutual funds as an investment medium for their employees’ retirement accounts, but you may also want to consider investing your own personal individual retirement account, aka a IRA, in a mutual fund.
One of the benefits of mutual funds is that because the sum of money is so large, it makes the cost of purchasing and selling stocks much cheaper than it would be if you invested in them alone.
It also means that the fund manager can invest in more stocks and bonds than you can on your own. Another benefit of investing in a mutual fund is that someone else is managing the investments for you.
Yes, this is a potential risk, but ideally you would choose a fund company that has a good reputation and track record and will have a manager in charge of the fund who has experience in investing and has been successful at it.
How to purchase a mutual fund
You can purchase a mutual fund in several ways:
1. Directly through the fund company. Vanguard, PIMCO and Fidelity are just a few of the many fund companies.
2. From a “supermarket.” This is basically purchasing funds through a third-party company. They are likely to charge you for purchasing funds, so be aware of all of the possible fees before investing with one of these companies.
3. Through a broker or financial planner who is qualified to sell investments. The benefits of going through a broker or a financial planner are that they are professionals who know about the market and the funds, and it is probably the most cost-effective way to go. Brokers will charge you for their services and possibly additional sales charges. Financial planners may do the same, but probably the least expensive thing to do would be to find a financial planner who charges by the hour instead of commission. They can probably find some less expensive, no-load funds for you (which are defined below).
It is important to be aware of load fees. Load fees are what brokers and financial planners charge you to make a commission on the money they invest on your behalf. Brokers either charge you at the beginning (front-end load) or at redemption or sale of the fund (back-end load). Funds without loads are called no-load funds. In addition to these stated or understood fees, some brokers will try to tack on 12b-1 fees, an extra but unnecessary expense to your investment. It is perfectly legal for them to charge you these fees, but is also perfectly unnecessary for you to pay the extra fee as the investor, so avoid them if you can. It might not be a stated fee so you may need to ask about it.
Checking out fund companies, brokers and funds
It is crucial to do some research before diving in and investing in anything, whether it is a stock, bond or mutual fund. You want to choose a fund company that has had consistent success in its performance and has a good reputation. The same goes for brokers. It is important to do a broker check beforehand, which can be done through the Financial Industry Regulation Authority, an independent and not-for-profit agency dedicated to regulating the securities industry.
Morningstar.com is another helpful website that allows you to check the performance of mutual funds as well as other investments. As with any investment, make sure you do your research before investing your money. You should always know what you are getting into ahead of time.
Although many college graduates will hit the ground running, wisely investing and saving your money will ensure you don’t have to keep running by the time you’re ready for retirement.
Rachel Vogler is a senior in personal financial planning and peer counselor for Powercat Financial Counseling.