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I was talking to a friend of mine the other day about investing. She just recently received her tax refund and had yet to “spend it” as she said. Naturally I suggested that she invest it. We got to talking about what she might invest her money in and since she has absolutely no investing experience I suggested that she might consider a mutual fund. She had heard of mutual funds before, but wasn’t exactly sure what they are. Of course I told her she should read my blog post about mutual funds, when suddenly I realized I didn’t have one. Thinking that it was really quite irresponsible of me to not have covered this topic as of yet, I am now going to right this wrong. Welcome to Mutual Funds 101.

What is a Mutual Fund?

A Mutual Fund is a diversified portfolio of investments… essentially a ready-made, specifically focused, investment portfolio. A Mutual Fund is a large pool of money which is used to invest in stocks, bonds or other securities. Mutual Funds are attractive to a large number of people because it is easy to purchase shares and they are great for investors who do not have the time or the desire to create their own diversified investment portfolio. Mutual Funds are usually geared towards one of three different goals: income, growth or a mixture of the two. An income fund invest mainly in - you guessed it - income investments such as bonds, preferred stock and income-oriented common stock (stocks that pay a high dividend). A growth fund invests mainly in high-growth (often small or mid-cap stocks) stocks and other types of growth investments. And finally the growth/income fund would invest in a mixture of these types of investments so as to provide a stream of income to the investor as well as potential for future growth.

How do I purchase a Mutual Fund?

To invest in a Mutual Fund is similar to investing in the stock of a company. Mutual Funds are sold by the share, just as stocks are. The Net Asset Value (NAV) of a Mutual Fund refers to the value of just one share of a Mutual Fund. This NAV is updated daily. Investors have two choices when it comes to investing in a mutual fund. They can purchase shares of the fund from the fund company directly or purchase shares through a brokerage account.

If you already have a brokerage account you might consider purchasing shares of funds directly through your brokerage, so as to keep all of your investments in one “place.” One thing to keep in mind is that some brokerages charge a flat fee to invest in a fund. This fee might make it more practical to purchase directly from the mutual fund company.

Some brokerages include E*Trade, Scottrade and Zecco Trading. Some great Mutual Fund companies include Vanguard and T Rowe Price.

Update: A great place to do research on mutual funds is over at Morningstar.com

“Choosing a [financial institution] is not a decision that should be made on a whim. A [financial institution] is supposed to save you [or help you earn] money, but without the proper amount of research it is possible to end up with one that costs you money.”

I’ve been an employee of a local credit union for about two years now, and I’ve heard stories from a lot of people who have savings, checking accounts, loans or investment accounts at other financial institutions. I myself used to bank with one of the big banks and ever since I switched my accounts over to the credit union, I have been much happier with the handling of my finances. Most people think enough about their finances to be aware of how much they make and how much they spend. Unfortunately I don’t believe many people really ever think about choosing financial institutions that will benefit them the most, but rather which one is closest to their house, or which one their parents, siblings or spouse do business with. I think this quote from Sandra Masterson’s Banking Blog is a fantastic way of stating the need to think when choosing ones financial institution(s).

I could not have said it better myself. I truly believe that time and effort should be put into researching local (or maybe even not local) institutions and the different products, rates and fees that they offer and charge. Here’s a quick list of the features I look for when choosing a bank (or credit union) as an example.

• Convenience (this doesn’t necessarily mean closest)
• Product Offerings (how competitive are their rates? what fees are associated with their deposit accounts?)

I have a large majority of all my financial accounts at two financial institutions: Desert Schools Federal Credit Union and USAA. Why did I choose to do my business with these institutions? I’ll start with Desert Schools, which I’ll refer to as DSFCU. I have had a savings and checking account at DSFCU for about three years. Before I banked with DSFCU, I banked with Chase and at one point Bank of America. I don’t have any horror stories from either of these big banks, but they always seemed to leave me longing for more. I learned about Desert Schools through a friend and decided to go check them out. I was pleasantly surprised to learn that not only did they offer free checking, but their savings rates were some of the highest I’d ever found (this is not including online savings banks which have low overhead and can thus offer higher rates). I became especially impressed with them when I noticed how typically friendly and helpful their staff was. Finally I appreciated the fact that they offered overdraft protection through a personal line of credit, which has saved me from overdraft fees on more than one occasion.

USAA is a financial institution that I am especially happy with. They cater themselves mostly to those in the military, which I find especially upsetting because the majority of my friends and family are not able to do business with them. USAA is a full-service financial services provider. They offer products including banking, insurance, and investing. I utilize at least one product from each of these categories. USAA is convenient to me because almost everything can be done online, and this includes depositing checks. I can make insurance payments, transfer funds (between USAA and other institutions) and purchase stocks or mutual funds. They also offer very competitive rates.

I’d like to make a quick list for you of some financial institutions that I’ve done business with in the past or that I am currently doing business with that I have found to be useful in helping me achieve my financial goals. I’ll list them by category.

Banks/Credit Unions

• Desert Schools FCU (Phoenix, AZ based)
• USAA
• HSBC Online Savings

Brokerages/Retirement Accounts

• Scottrade
• Sharebuilder
• USAA

Insurance

• Geico
• USAA

I hope that this has helped everyone recognize the value of researching financial institutions before doing business with them. I also hope that if you are currently unhappy with your financial institutions you do business with that you will take a day to sort out your finances and transfer your accounts to somewhere which will help you along the way to financial independence. Good luck!

Do you have any rich relatives or friends? If one of them were to call you up and tell you that if you invest your money in a mutual fund that they would match dollar-for-dollar up to 5% of your investment amount, would you turn them down? I would hope not. Unfortunately this is exactly the sort of thing that I see my friends and associates doing quite frequently. Of course I’m not referring to my best friends rich Uncle, but rather his employers’ 401(k) retirement program, and their matching funds policy!

So let me ask you again, are you ignoring free money? If you are contributing to your 401k plan and taking advantage of the full employer match, then good for you! However if you are like my friend and haven’t bothered to sign up for your 401k for whatever reason, then I’m going to strongly recommend that you quit procrastinating and (as Nike loves to say) just do it! Don’t try to convince yourself that it’s not that important right now with one of your lame excuses… just get it done! When you next go into work send a quick e-mail to your boss, your manager, your HR rep; whoever you need to contact to ask them what you need to do to start contributing to your 401k.

What is a 401(k) and how does it work?

A 401k is an employer-sponsored retirement plan and is named after section 401(k) in the IRS tax code. When you sign up to contribute to your 401k you elect a certain percentage of your gross (meaning before taxes and other withdrawals) income to be contributed to your 401k plan. The percentage that you choose will then be withdrawn from each of your paychecks, and put into your 401k account. These funds are then used to purchase mutual funds or other securities (such as your employers stock).

Pretty simple eh? There is one more benefit I’d like to mention: the tax advantages of a traditional 401k. Any monies which you contribute to your 401k are not taxable (this would not apply to the Roth 401k*)! In other words if you make $30k a year and contribute 10% of your pay to your 401k your taxable income will only be $27k instead of the $30k which you actually earned! At a 20% tax rate this comes out to a tax savings of $600 dollars!

*I will cover the Roth401k in another article.