What is a Mutual Fund?

How they work, what are the benefits and other considerations

A husband and wife with a young infant sitting at a desk overviewing financial documents.

Especially when you’re at the start of your investment journey, it’s easy to be overwhelmed by all the various financial products offered. Where can you begin?

Many investors consider mutual funds a simplified option that suits their needs best.

So – what is a mutual fund?

A mutual fund is a type of investment that gives you access to stocks, bonds, and other investments at a scale that might otherwise be out of reach without the help of an investment firm. Many retail brokers offer thousands of stocks and bonds for individuals to buy. However, the practicality of selecting and managing a portfolio of hundreds of stocks and bonds represents an overwhelming exercise for many.

Investing solely in mutual funds can expose you to hundreds of carefully selected securities. With the right mix of just a handful of funds, you can create a diversified portfolio.

We’ll start by explaining how mutual funds work, then examine various types and their benefits.

How mutual funds work

When you invest in a mutual fund, you pool your money with other investors to buy stocks, bonds, and other investments. As an investor that buys shares of a mutual fund is called a “shareholder” of the fund.

But don’t worry – you don’t have to be a financial expert to invest in a mutual fund. A financial advisor can help you find the investment strategy that works best for you, based on your financial goals, risk tolerance and timeline for achieving your objectives. This person can help implement the strategy, and then portfolio managers will monitor the investments of each fund selected.

Types of mutual funds

Your financial goals are as unique as you are.

Maybe you’re a young professional looking to build wealth. Or maybe you have a spouse and children and want to plan for your family’s financial future.

By carefully assessing your financial objectives, you can find a mutual fund that suits your needs.

A few types of mutual funds your financial advisor might suggest are:

Equity funds – funds invested in stocks
Fixed income funds – investments that have a fixed rate of return, such as bonds
Index funds – a portfolio designed to closely mimic a specific index’s performance, such as the S&P 500 or Dow Jones

Your financial advisor can help you find the best products for your situation.

Benefits of choosing mutual funds

Now we know the various types of mutual funds and how they work. But what sets mutual funds apart from any other investment? Consider the following benefits:

Diversity

Why risk putting all your investments in just one stock or industry? Without diversifying, you can find yourself at higher risk. Mutual funds allow for diversity with various asset types and classes that aim to mitigate risk.

Dividends and interest

Mutual funds may yield dividends from stocks (payouts from the investments’ earnings) and interest from bonds. You can use dividends and interest to purchase more shares in the fund, potentially growing your wealth further.

No expertise required

With their many benefits, mutual funds are a popular choice among investors.

Once you determine your financial goals, risk assessment and suitability, you can decide how much you want to invest. Then, you can determine where to buy mutual funds. You can buy directly from a company with mutual funds or through an online brokerage. Lastly, it is critical to pay attention to fees and/or loads when purchasing mutual funds, which will directly impact total returns over time.

Additional considerations: Faith-based mutual funds

For individuals interested in faith-based opportunities, many companies now offer options to invest in a socially responsible way that aligns with one’s faith.

Knights of Columbus Asset Advisors (KoCAA) is equipped to help investors reach financial goals through a family of mutual funds that fully leverages a Catholic investment approach.

KoCAA is committed to investment guidelines set by the United States Conference of Catholic Bishops, and with over $28 billion* in assets under management, it is at the intersection of Catholic and capable.

To learn more about your investment options with Knights of Columbus Asset Advisors, complete this short form to request more information.

*AUM as of March 31, 2024.