Whether you’re an experienced investor or just a beginner, you probably know something about mutual funds.
They’ve been around since 1924, and the Investment Company Institute estimates that nearly half of all U.S. households now invest in them.
Mutual funds have grown so popular because they offer easy access to different securities without the need to research and buy hundreds of stocks. Years ago, before mutual funds, small investors couldn’t put up enough money to invest in a company like Apple or Microsoft. Now, they can get into a fund that holds those sought-after stocks (or commodities, bonds, currencies and precious metals).
But there are many things about mutual funds the average investor might not be aware of — and those gaps in your knowledge could end up costing you money.
Often your fund’s expenses can be higher than you think. There are the stated expenses (disclosure is required by the Securities Exchange Act of 1934), which include administrative, management and marketing fees, as well as front- or back-end commissions. But there are plenty of unstated expenses as well, but you have to know where to look in order to find them.
Each time a mutual fund buys and sells, it incurs a small trading cost. The greater the activity, the higher the cost. There are transaction commissions and market impact costs, too. And mutual funds can be tax inefficient. Often, a fund will issue 1099s for gains the fund made. The investor doesn’t actually see the money — it’s reinvested — but they pay taxes on it.
What can you do to help make better investment decisions for your hard-earned money?
You don’t need to become an expert on mutual funds, but you do need to know the basics. Talk to a trusted financial professional who can help you understand the good, the bad and the fine print.
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