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Investor's Perspective: Mutual Funds Explained

A mutual fund is an investment vehicle that pools in money from many investors and then deploys that capital into a collection of financial securities such as stocks, bonds, or other types of assets. Mutual funds are sold to investors on a per-share basis. For example, you can purchase shares of a mutual fund similarly to how you can purchase shares of Apple Inc.

The buy-in price of a mutual fund is determined by the net asset value (NAV) which is the total value of securities within the fund, divided by the number of outstanding shares.

For the average investor who does not study the markets for a living, a mutual fund may give you more exposure to a pool of assets that you otherwise may not be able to create on your own. Typically a portfolio manager is designated to oversee the mutual fund and is responsible for the performance of the fund. Commonly the portfolio manager's objective is to outperform a targeted benchmark such as the S&P 500 index.

Things to watch out for...

If you are working with someone such as a financial advisor, make sure that you conduct thorough due diligence on the individual who is attempting to sell you the mutual fund to verify their track record and trustworthiness. In addition, you should always ask the financial professional that you are working with the following basic question:

"How are you compensated with this mutual fund?"

If their response is a "fee-only" compensation structure, then it is likely that you are dealing with someone who has virtually eliminated if not all, then most potential conflicts of interest and is positioned to provide you with genuine unbiased advice.

If their response is a (commission-based) compensation structure, then it is likely that there is a potential conflict of interest between you and the advisor where they may not be positioned to give you genuine unbiased advice. This can mean that the commission-based advisor is mandated to place the best interest of the firm before the client's best interest so long as they meet the criteria of what is known as the suitability standard.

I am not suggesting that a commission-based advisor should be a deal-breaker for you, but I am suggesting that you should proceed with caution.

If you are a do it yourself-er, make sure that you examine the performance record of the mutual fund and fully understand the associated management fees before you buy shares of the mutual fund.

As always, before you make any investment decisions, identify where you are today in terms of your net worth/monthly-cashflow, clearly define where you want to go, and then decide on the best plan of action to get there.

If you valued this article please hit the 'like' button and also share via your Twitter, LinkedIn, Instagram, and Facebook social media platforms. I encourage you to join the conversation or ask questions in the comments section of this post.

Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.

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