What are Mutual Funds and What do You need to be Aware of Before you invest your Hard Earned Money?

Should you invest in mutual funds instead of stocks? What exactly are mutual funds? What are the things you need to know or be aware of before you invest your hard-earned money? [music]

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of The Retirement Income Show. The last video talked about stocks and individual equities. A mutual fund is nothing more than a basket of stocks that’s actively managed, which means somebody usually on Wall Street or in a big investment company is buying and selling on your behalf.

Now, that creates more diversification because instead of just owning one company like Microsoft, that manager is going to buy hundreds of different companies across different industries in different sectors and spread your money around, which reduces the risk. Now, in order for them to do that, it costs money, and guess who pays them? You do. If you’re already an investor, I want you to comment down below if you prefer mutual funds, or if you prefer individual stocks. Comment mutual funds if that’s how you like to invest, or stocks if that’s how you like to invest. Make sure to hit that subscribe button while you’re down there as well.

I want to go over some of the things you need to know which are the mutual fund fees and hidden costs, which most people aren’t aware of so you’re going to be in the loop. Everyone can easily find the mutual fund expense ratio. This usually averages somewhere around about 1% per year, but the expense ratio only covers the manager’s salary and the overhead of operating the fund. When they actively buy and sell stocks, those costs get passed on to you as well. Transaction costs.

Every time they buy or sell something, a commission is generated and you pay the commission. Taxes. When they sell something that has a gain, those taxes are accumulated and passed on to you. Then what we call 12b-1 fees, which are essentially marketing or commissions. If you go to a broker, if you go to someone who makes a commission off selling mutual funds, these 12-b1 fees can drag down the performance of your portfolio even greater, and you pay those costs as well.

We need to be aware of this and weigh, is the benefit of professional management by a mutual fund manager worth the cost that we’re paying? I recently did an analysis of several fairly popular mutual funds, and all of these fees added up came to more than 2% per year. Be careful which mutual funds you invest in, understand the fees that the professionals behind the scenes are charging you, and how that can drag on performance over time.

Watch our compound interest video to understand the difference in your money between averaging 8% a year or 6% a year because of mutual fund fees.

If you liked this video, make sure to hit that subscribe button down below. Hit that like button. The little bell icon, that’ll notify you whenever we upload new content like this. Also, comment down below if you’re a mutual fund investor or if you prefer individual stocks. Just write mutual funds or individual stocks. [music]