MONEY OBEDIENCE

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Mutual funds are pools of money invested in various financial instruments in a certain way. The investment method is described in the so-called prospectus — a little booklet that explains it all; each investor in a mutual fund must receive it. Mutual funds are sold to the general public, which is why they have to follow strict rules imposed on them by government regulation.

Mutual funds take large pools of money and invest in many different financial instruments such as stocks and bonds. Since it can be that one instrument does not perform well, but the many others held in a fund may, this balance of risk can be beneficial to any give individual investor.

Let's look at an example. You want to invest $1000 in stocks. If you buy stocks outright, you will not be able to buy many different kinds of stocks. Your $1000 simply won't stretch that far! This means that your profit and loss will depend on only the few different stocks you can afford to buy directly with your $1000. If you invest these $1000 in a fund such as an index fund, an exchange traded fund (ETF), or a mutual fund, your money becomes part of a larger pool of money that is invested in many different stocks. If one of these stocks does not perform well, the many others held by the fund may do much better. When a fund's many good and bad stocks balance each other out, your money will most likely show a stable return in the long run.

Mutual funds charge you money, called the management fee, for giving you the benefit of more stable returns and for managing your money. Many mutual funds issue different kinds of certificates, and these certificates include this management fee in different ways. Depending on the kind of certificate you buy you may have many options to pay the fee such as: when you first invest, when you withdraw your money, an annual management fee, or you might pay a combination of such fees. It is, therefore, very important to read the booklet which describes these various fees. If you need help interpreting the features of the certificates on offer, you can ask a financial advisor how the various certificates might impact upon your savings and investments.