What are mutual funds? I’m sure everybody has heard this term before event though from what I can see it’s becoming less and less of an investment vehicle that people use. These are notoriously the things that big banks push (their own). I’m not sure if that’s still the case but I do remember my experience getting one years ago from a bank.

What are mutual funds?

A mutual fund is a collection of assets such as equities (stocks), bonds (government debt), and other securities that is run by a fund manager. The fund collects and pools money from individuals who invest in it (shareholders) and invests the money on behalf of them into the collection of assets. You, as the shareholder, make money depending on the collection of assets, how they do, any realized capital gains of stocks sold, dividends, interest, or when you sell the fund, the increase in the value of the share (also a capital gain).

Honestly, it wasn’t the worst place to start investing and I wouldn’t blame you if you started here as well, since you basically buy shares of the funds you want depending on your risk tolerance (can you withstand a lot of fluctuation over the long term) and let the fund manager deal with the complicated management of which stocks to sell and when, and what bonds to buy and when, etc.

Downsides

The cons of mutual funds, and the reason why I moved away from them, are that while you can buy the funds directly from the issuer, most people will buy them through the bank. So right off the bat there’s a bias there. I remember trying to get rid of my mutual fund was a very difficult process because banks don’t like to see your money leave them. One of the biggest detriments is the management expense ratio (MER) since those fees are usually pretty high (like 1-2%). 1-2% fees may not seem high but that’s a lot of money coming off of your investment. And lastly, there’s no guarantee that the fund manager will do a good job and outperform the general market so that high fee may not even be worthwhile in the long run.

Ultimately there are better investment vehicles out there in this modern world like exchange-traded funds. Which I will cover in the next topic!