Mutual Funds

Last updated: April 13, 2016

An Introduction to Mutual Funds

Mutual funds are the investment of choice for most Americans, and for good reason.

  • Mutual funds give us cheap and easy access to stocks and bonds (and other types of securities) to increase our wealth.

  • Over time, mutual funds can help us multiply our savings for such goals as retirement, buying a house, or paying for college tuition much faster than if we kept our money in a bank account.

Here’s How They Work, and Why They Work so Well:

Mutual funds combine the money of many investors.

  • Most funds have many thousands of investors, and all of their money adds up to hundreds of millions, and sometimes even billions, of dollars to invest.

With all that money, a fund can invest in dozens or even hundreds of securities. If you own just a few stocks, for example, and one of the companies gets in trouble and its stock drops, you could lose a big chunk of your money. By spreading your money among many stocks (called diversifying), one failure will not have a big impact.

Most investors wouldn’t be able to afford the cost of buying so many securities.

  • Such diversification would be very expensive if you tried to do it on your own. Buying and selling small numbers of stocks would involve paying high commissions.

  • Because a mutual fund trades large blocks of stocks, the cost of trading is low.

Low Cost to Start

Some funds accept as little as $250 to open an account. More typically, minimums range from $1,000 to $2,500. Once you open an account, you can usually add as little as $100 at a time.

When you buy mutual funds, you’re also buying the skills of the people who manage those funds.

  • Choosing among the thousands of stocks and bonds available is a task that most people don’t have the time, the interest, or, frankly, the skill to do. Mutual fund managers do the choosing for us.

Automatic Reinvestment of Earnings

Dividends paid by stocks in the fund’s portfolio, interest from bonds, and capital gains earned by selling securities can be automatically reinvested for you in additional fund shares.

  • Reinvesting earnings is a critical element in any long-term investment plan.

For all these reasons, mutual funds are one of the best vehicles for achieving long-term goals. As investors, your challenge is to choose among the thousands of mutual funds available.

*The information on this page is credited to IPT and Kiplinger. Their original materials are made available on the Kansas Securities Commissioner's website.