What is a mutual fund? That’s a great question to ask because if you’re wondering the answer, it means you’re interested in investing and growing your wealth.

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To put it simply, a mutual fund is a pool of money that’s used to invest in stocks, bonds, and other securities. Investors provide the money that goes into the mutual fund, and a mutual fund manager decides where the money will be invested.

Inside of each mutual fund are shares of many different companies. So, one share of a mutual fund could include small percentages of Apple, Microsoft, and Warren Buffett’s company, Berkshire Hathaway. Many investors believe this is a more conservative way to invest because you spread out your risk.

To put it another way, if one company inside your mutual fund portfolio experiences poor performance in the market, the other companies inside the mutual fund can balance it out. For that reason, buying mutual funds is considered less risky than buying individual stocks.

What is an example of a mutual fund?

There are thousands of different mutual funds available. Here is an example of one of them.

Please note: This is not a recommendation to purchase this particular mutual fund. It’s an example of a mutual fund so you can see how a mutual fund encompasses many different stocks.

The Schwab Total Stock Market Index Fund

This is an index fund. An index fund is a type of mutual fund where the fund managers try to track and mimic a certain index, like the S&P 500 or the Dow Jones Industrial Average. So, if the S&P 500 is up 2% on any given day, an index fund that tracks the S&P 500 should technically also be up 2% on the same day.

The Schwab Total Stock Market Index Fund does just what it sounds like. It tracks the total returns of the entire U.S. market.

The top 5 holdings in this fund are:

  • APPL, Apple Inc makes up 3.72% of this fund.
  • MSFT, Microsoft Corp, makes up 2.87% of this fund.
  • AMZN, Amazon.com Inc, makes up 2.69% of this fund.
  • FB, Facebook Inc A, makes up 1.40% of this fund.
  • BRK/B, Berkshire Hathaway Inc B makes up 1.33% of this fund.

That means when you buy one share of the Schwab Total Stock Market Index Fund, the share is actually made up of investments representing many different companies. So, instead of buying individual shares of APPL or FB, which can be risky, you can buy a share of a mutual fund like this that already includes many of these companies.

Can you lose your money in mutual funds?

Yes, you can. As stated, a mutual fund is made up of many different investments, and the stock market can be unpredictable. On any given day, stocks can go up or down. If the market is down, your investments can go down too.

The good news is that a mutual fund is made up of many different stocks, bonds, or securities. That means that even if one investment in the mutual fund is having a bad day in the stock market, another could be having a great day. That’s why so many investors, both new and experienced investors, like mutual funds because it’s a way to invest conservatively.

What is a Mutual Fund Account and How Does it Work?

Here is a step by step guide for opening a mutual fund account:

  • Step 1: Decide how much money you have to invest in mutual funds. Some companies will let you start investing with as little as $100 whereas others might require minimums like $3,000.
  • Step 2: Find a mutual fund company to invest with, preferably one that will allow you to invest with the amount you’ve saved for this purpose. Fidelity, Vanguard, and Charles Schwab are just a few of the many well-known mutual fund companies out there.
  • Step 3: Double check fees. Make sure you know how much of your money will go to the mutual fund company. Typically, actively managed funds have higher fees than passively managed ones. Do your research to decide which is best for you.
  • Step 4: Open your account. Now that you know how much you want to invest and you’ve decided on a company to invest with, open your account with them. Once your account is open, put in an order to buy mutual funds.
  • Step 5: Check-in. You can check in and track your returns at any time and you should so you stay knowledgeable about your investment portfolio.

How Do You Make Money From a Mutual Fund?

Ideally, you make money from a mutual fund through your investment returns. So, if you bought one share of your mutual fund for $50, but a year later a share of the mutual fund is now worth $100, you’ve doubled your money. You can then sell that share and pocket the profit, keeping in mind you’ll likely have to pay taxes on that profit.

What’s the Difference Between an ETF and a Mutual Fund?

While you’re researching mutual funds, you might come across a term called an ETF or an exchange-traded fund. ETFs are very similar to mutual funds in that they are a fund made up of many different investments.

The difference is that you can trade ETFs like stocks, which means you will often pay a fee to buy and sell them. However, ETFs often have lower fees and expenses than mutual funds. Additionally, only a few ETFs are actively managed like mutual funds.

What are the Benefits of a Mutual Fund?

There are many benefits to investing in mutual funds.

  • Diversification – As mentioned previously, investments inside of mutual funds can represent many different types of stocks, bonds, and other securities.
  • Liquidity – You can sell a mutual fund easily.
  • Professional management – Mutual funds typically have professional managers choosing where to invest your money.

Can You Withdraw Money From a Mutual Fund Without Penalty?

If you invested a mutual fund inside of a retirement account like an IRA or 401(k) you may be charged an early withdrawal penalty if you are under the age of 59 and a half. If you sell a mutual fund that’s not within a retirement account, you may not get a penalty but you might have to pay capital gains taxes if you profited from your investments.

How Much Money Do You Need to Start a Mutual Fund?

As mentioned previously, some companies will allow you to invest in a mutual fund with as little as $100. The key is to take your time and do your research. Find out management fees before you choose a company to invest with. Also, take a look at the historical returns of a particular fund you’re interested in to learn more about how it weathers stock market fluctuations before investing in it.

Final Thoughts

Mutual funds are an extremely popular and common way to invest. There are thousands of mutual funds available for investors, and many different mutual fund companies who offer them. Hopefully, you now have a basic understanding of what a mutual fund is and feel confident to take the next step to research a mutual fund that’s best for you and your future goals.