Summary of video: What is a Mutual Fund?
Definition of a Mutual Fund
(Watch on video starting at 1:15)
- “Basket” that holds many investments
- No more than 5% can be invested in any security
- Stock and bond funds
- Large company funds
- Small company funds
- Foreign company funds
No Load Mutual Funds <<< YOU WANT THESE
(Watch on video starting at 2:47)
- Purchased directly from mutual fund company
- Also know as “No help funds” due to lack of advice
- No up-front sales load or charge
Mutual Funds with Sales Charges <<< AVOID or MINIMIZE
(Watch on video starting at 3:47)
- Sold by a stockbroker or advisor
- Three methods of paying for their service << avoid all 3 if you can!
- A. Up-front fee (deducted from the amount you invest)
- B. Back-end load (higher annual fee + add’l charge if you sell within the first years)
- C. Annual fee is a percentage (often 1%) of the total amount you have invested
Summary (starting at 7:30)
- No-load funds DON’t charge an up-fron t sales commission
- Load funds DO charge sales commission – either up-front, back-end or annual load
Additional Fees and Expenses to Own a Mutual Fund
(Watch on video starting at 8:00)
- “Management fee” << reported as “Expense Ratio”
- Transaction costs << Not reported! (Beware funds with high “turn-over”)
Types of Mutual Funds
(Watch on video starting at 9:25)
- Stock Funds
- Bond Funds
- Balanced Funds (combination of stocks and bonds)
- Actively Managed Funds
- Passively Managed Index Funds << not mentioned until later in this video
Mutual Fund Benefit: Instant Diversification
(Watch on video starting at 13:06)
The presenter states that you are instantly diversified among at least 20 different companies, but then goes on to say this:
Twenty really IS a magic number. Many studies have shown that once you own at least twenty different investments, you have achieved the maximum benefit of diversition: protecting yourself from the risk that you will lose your shirt if one of your investments goes into the toilet!
I quibble with the notion that you have reached “maximum benefit” of diversification. In fact, Nobel Prizes have been awarded to economists that show the optimum portfolio is to own every available security.
The Reality of Mutual Funds and Mutual Fund Managers
(Watch on video starting at 13:52)
- Introduces the concept of index funds
- Because of the higher expenses, actively managed funds are NOT the way to go.
Taxes and Mutual Funds on taxable accounts (not 401k, IRAs, etc)
(Watch on video starting at 15:51)
- Mutual funds distribute at least 95% of all capital gains and dividends annually
- Owners will receive a tax bill in the form of a 1099
- Pay taxes on “phantom income” not taken out of the fund
- Double whammy when fund loses money and you still pay taxes!
Footnotes and Credits:
This video was produced by Checks and Balances TV with host Matthew J. Rettick and was uploaded to their YouTube channel on March 28, 2011 with the title: The Truth About Mutual Funds. I have created a summary and transcript to help you find spots that interest you and make the best use of your time.
The mission of Checks and Balances TV (CBTV) is to provide Americans with the information they need to achieve financial freedom and retirement success.