This episode is part of the Investing 101 Series.
Investing 101 is your introduction course into all things investing. Think of this like taking a finance class, but in bite size pieces. Each episode in this series is meant to build upon each other in order to teach you the fundamentals of investing.
Today we are tackling Mutual Funds!
Meet Today’s Guest – Caleb Silver
Caleb Silver is the Editor in Chief of Investopedia. He began his career as a documentary producer, but was quickly swept into covering business news for Bloomberg as the dot com bubble was growing. He went to CNN to run its business news coverage and spent 10 years at the network in a variety of executive capacities, including the Executive Producer for CNNMoney, the Director of Business News and a Senior Producer on the Situation Room with Wolf Blitzer. Caleb came to Investopedia in 2016 because he was fascinated with the website, having been a user for more than ten years. He quickly learned just how vast it is, how many people it reaches every day and how critical it is to helping them make sense of the financial world. Investopedia has come a long way as a site in 20 years, but Caleb says its best years are ahead.
What is a Mutual Fund?
We have a technical definition for mutual fund on Investopedia, and I’m not gonna read from it. I wanna break it down a little bit more simply. So think of a mutual fund as a basket of securities. Let’s use stocks, for example. Let’s say you want to own Amazon stock or Apple stock, or a bunch of different technology stocks, but you don’t want to buy them individually, and you want to spread your risk, or own a bunch of them together. You can buy them in a basket, or what we call a mutual fund, which is a bunch of securities that are in one fund that you buy together at one price. So it gives you the option of buying the bunch versus buying individual securities.
Why is buying stocks together in a mutual fund better than buying them individually?
Folks like to do it whether they want to get exposure to a sector, like technology or energy or healthcare, instead of trying to pick the right stock that they think is gonna go up over time, they can pick a bunch of stocks in a sector, and then gain exposure to the entire sector. It lowers your risk because if you buy an individual stock, something could happen to that company, and you could lose your investment. If you buy a bunch of them, the risk of that happening across all of them is smaller.
Now, all sectors go into cycles, up or down. We know when things are going well, like technology in the beginning of the year, the technology sector went up. When the technology sector turned south, all technology stocks turned down, as did the mutual funds. So the reason you’d wanna do it is to reduce your risk to one stock per se, and gain exposure to an entire sector. It sometimes can be cheaper than buying an individual share depending on the share price.
How do you buy a Mutual Fund?
Well, they couldn’t be any easier to buy. If you watch sports on the weekends, you’ll see a lot of mutual fund companies, like Fidelity or Schwab, advertising on those events. You open an account with any brokerage, and even some big banks can give you access to mutual funds, and you have the option of adding them into your portfolio, buying them in your portfolio.
You can pick the different funds you want by sector. So if you want exposure to the S&P 500, the top 500 stocks in the US, you can buy an S&P 500 mutual fund. If you just want technology, you can buy a technology oriented mutual fund. But they’re just like picking stocks, you’re just picking a fund that has a bunch of stocks in it. Couldn’t be easier.
You can look inside each fund, and see what stocks they own, and what stocks have the highest percentage concentration inside the fund. So every mutual fund is made up of a bunch of securities. Let’s again use the example of stocks. You can say, “I want to own a mutual fund that’s exposed to technology, and I want one that’s heavily weighted towards Amazon, Facebook, Netflix, Apple,” for example.
Or you can buy one that has nothing to do with those types of technology companies that has only to do with, let’s say, hardware technology companies, like Cisco Systems and others. And pick a fund that is concentrated in that type of technology exposure. It’s important to see what’s inside the fund, and how much each fund has of individual stocks because that’s gonna tell you what your exposure is to those stocks.
What’s the difference between a Mutual Fund and an ETF?
Caleb and the team over at Investopedia have put together an amazing video to help you learn the difference between a Mutual Fund and an ETF or Exchange Traded Fund. Visit https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp to check it out! Also make sure you are subscribed to Popcorn Finance because Caleb will be back soon to teach you all about ETFs in our next Investing 101 episode!