Investment Tip 5: Understanding Mutual Funds

In earlier Investment Tips, I provided an overview of stocks and bonds. If you have a basic understanding of stocks and bonds, then learning about mutual funds should be fairly easy. A mutual fund is a pool of stocks or bonds. An equity mutual fund, which is also called an equity fund or mutual fund (which is a bit misleading) is a pool of stocks. A bond mutual fund, or bond fund, is a pool of bonds.

Mutual funds allow investors the opportunity to invest a variety of stocks that normally would only be  available to the wealthy. Additionally, owning a mutual fund allows diversification of a bunch of stocks (or bonds) without having to purchase (and sell) each of those assets individually.

For example, the T. Rowe Price Growth Stock Fund (PRGFX) is growth equity mutual fund focused on growing companies that pay dividends. For PRGFX, the following stocks make up 40% of the equity mutual fund:

  • Alphabet (owned by Google)
  • Amazon.com (AMZN)
  • Apple (AAPL)
  • Bristol-Myers Squibb (BMY)
  • Danaher (DHR)
  • Facebook (FB)
  • MasterCard (MA)
  • Microsoft (MSFT)
  • Priceline (PCLN)
  • Visa (V)

Rather than buying each of these stocks individually, you can invest in a mutual fund for a themed investment approach that is more affordable to all investors. In the case of PRGFX, the theme is growth stocks, most of which are technology companies.