You may have heard the phrase, “A mutual fund is a like a basket of stocks.” (Here, we compared a mutual fund to a box of wines.)
Now it’s time to explore what that really means, as part of our new Investing 101 series.
When you buy shares of a particular mutual fund, you’re pooling your money with thousands of other investors (that’s the mutual part).
All that money—typically millions or billions of dollars in a single fund—is then used to buy stock in different companies, bonds, real estate or other investments.
Most mutual funds are “actively managed,” which means that a team of investment experts decides what goes into the fund. Index funds are “passively managed”, and simply mirror what a segment of the market does.
You probably chose certain mutual funds for your 401k account or IRA. While the amount you contribute each month may be small, say $200, you are actually buying a tiny fraction of all the investments (stocks, bonds, etc.) within those mutual funds.
How do you know what’s in your mutual funds? (For those of you into the Invest-Along-With-Ashley, she’s working on this, too.)
According to Morningstar, Inc., a top investment research company, there are about 8,000 different mutual funds. Each one, you might say, is a different flavor, because each contains different ingredients. Think Ben & Jerry’s, but on a very large scale.
There are mutual funds that are invested primarily in stocks, bonds, overseas companies—or some combination of the above, plus a few things we haven’t mentioned yet. Everything except pistachio.
To learn where your money goes in each fund, get your funds’ ticker symbols (the code used to look up all investments), and plug it into the search box on Morningstar.com.