When I was in high school, I had a substitute teacher give my class some of the best advice I’ve ever heard as a young Black student. He told us that we should invest in a mutual fund each month and let it grow. Had I listened to him and invested just a small amount per month, let’s say $50, I could have accumulated between $90,000 and $200,000 by now, depending on the return rate.
As I’ve gotten older, I’ve learned the value of investing. In this article, I’ll explain what a mutual fund is and why it would be beneficial for you to invest and encourage your working children to start investing at an early age.
What is a Mutual Fund?
A mutual fund is a type of investment that takes money from many investors and pools it together. The fund is managed by one or more well-seasoned professionals – the fund manager – who makes decisions about which stocks to buy, how long to hold them, and when to sell them.
While it’s true that you can buy and sell stocks at any time on your own, many of us lack the expertise to make sound decisions about which stocks to buy and when to sell them. Some of us might be tempted to buy stocks based solely on a social media post or a recent rally around a particular company. However, smart investing involves more than just “gut feelings.”
A mutual fund manager has the time and expertise to perform due diligence on a company before investing. They are versed in analyzing company financial data and identifying important industry trends, which may affect the current or future value of a stock. Additionally, mutual fund managers can use the pool of money to create a diversified portfolio.
Pros and Cons of Mutual Fund Investing
Built-in Diversification (pro): Mutual funds are a great way to diversify your portfolio without effort. You can invest in a variety of mutual funds to spread your money into different segments of the market. In my article, “Investing: Understanding Portfolio Diversification” I explain the importance of diversification.
Fees (con): Mutual funds charge fees to cover management costs, which can eat into your returns. These fees are typically a percentage of your investment and are known as the expense ratio.
Professional Management (pro): Mutual funds are great for those who do not have the experience to pick individual stocks.
Possible Capital Gains Taxes (con): When a mutual fund sells its stocks or bonds for a profit, you may be subject to capital gains tax even if you haven’t sold any of your shares.
Overview
Mutual funds can be a great investment for those looking to grow their wealth without the hassle of picking individual stocks. With a variety of investment goals and risk profiles to choose from, there’s a mutual fund out there to fit almost any investor’s needs. Plus, many funds have low minimum investments, making them a great way to get started in the market.
Encourage Teen Investing. I’ll share the same advice my substitute teacher gave me: Mutual funds are a fantastic way to introduce your kids to investing early. If your teenagers are entering the workforce, consider getting them started as soon as they turn 18 (the legal age to invest in the U.S.). Mutual funds allow them to benefit from compound interest over time. Additionally, unlike a savings account, the money would be less accessible, which may prevent them from dipping into it too soon. Teaching your children to save now sets them up for a bright financial future.
