Concerning Mutual Funds
In our last post, we compared mutual funds to ETFs, and we weighed the advantages and disadvantages of each. By nature, mutual funds and ETFs have a lot of similarities in that they’re both pooled funds used to buy baskets of different stocks or bonds sold as one unit. But when you get down to it, there are some very critical differences in their costs and who makes the decisions with your money. Because of these differences, at NEST we invest in ETFs.
But we realize that for DIY investors, or even professional ones without access to or expertise in analyzing good, unbiased data, it can be more difficult to navigate ETF investment successfully. After all, unlike mutual funds, they aren’t usually professionally managed. That means managing them is up to the investor, which for us is a great thing. It means our clients don’t have to pay the extra fees for a professional fund manager’s services, and we can be confident that our portfolios reflect the best data. For others, this lack of professional management can be a hindrance.
So, in the spirit of education, we’re taking a deeper dive into mutual funds — the different types, the difference between load and no-load, and what you should consider before investing in mutual funds.
What are Mutual Funds?
A mutual fund is a professionally managed investment fund that trades in diversified holdings. The investment companies that manage them raise money from shareholders to invest in stocks, bonds, futures, currencies, options, or money market securities. Each mutual fund is a diversified portfolio of stocks and/or bonds. Because the number of different stocks or bonds is usually 100 or more, the mutual fund shareholders hedge against the risk associated with non-diversified investments.
For example, if the price of some of the stocks in the fund drop, others may rise or hold steady. This mitigates the overall risk by spreading it out across the fund. This also lessens the impact of a specific stock or bond’s devaluation on the mutual fund’s net asset value (NAV).
Mutual fund shareholders share in the fund’s gains and losses equally, according to the number of shares they own.
Types of Mutual Funds
There are four basic types of mutual funds:
Equity funds – buys stocks of publicly traded companies
Bond funds – invest in government and corporate debt
Money market funds – fixed-income funds that invest in short-term, high-quality debt
Balanced funds – a blend of stocks and bonds
Other specialized mutual funds include:
Sector funds (e.g., tech, energy)
Global funds
Index funds
Hedge funds and managed futures
Diversification in Mutual Funds
Mutual funds simplify the diversification process. Instead of researching and buying dozens of different investments, you get instant diversification managed by professionals. You can also increase diversification by holding multiple mutual funds across different asset classes or investment styles.
Investment Objectives of Mutual Funds
There are three common objectives:
Growth (capital appreciation)
Income (regular income payments)
Safety (capital preservation)
Load vs. No-Load Mutual Funds
"Load" refers to commissions or sales charges.
No-Load Mutual Funds
Sold without commissions or sales charges.
Distributed directly by the investment company.
Fees are built into the expense ratio.
Load Mutual Funds
Include a commission or sales charge.
Sold via intermediaries (e.g., financial advisors).
Classes of Load Funds:
Class A Shares: Upfront fees (front-end load), with breakpoints for larger investments.
Class B Shares: Back-end fees (CDSC), converted to A shares after holding period.
Class C Shares: Annual 12b-1 fees, good for short-term investing but expensive over time.
Concerns with Mutual Funds
Cost: Dual fees (advisor + fund manager) add up quickly.
Liquidity: NAV pricing and lock-in periods make them harder to trade quickly.
Control: Outsourcing fund management removes flexibility in data-driven decisions.
At NEST, we view excessive reliance on mutual funds as a form of laziness. We prefer ETFs for their liquidity, control, and lower cost structure.
Questions to Ask Before Investing in Mutual Funds
What type of mutual fund is it?
What is its performance history?
What are the associated fees?
Who manages the fund?
What is its investment objective?
Want to learn more about alternatives to mutual funds? Schedule a no-obligation call with our team.
At NEST, we use macroeconomic data and active portfolio management to help our clients reach their financial goals. We proudly serve the Austin and Hill Country areas.
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Email: info@nestfinancial.net
DISCLAIMER: This article provides educational information and opinions only and does not constitute financial planning or investment advice. For personalized guidance, contact us at info@nestfinancial.net.