Audio Version: Let Me Hear It!
Meal delivery services like Blue Apron, HelloFresh and Plated have become quite popular in recent years, thanks to an increase in nutritional awareness, technology and our constant struggle to achieve a work-life balance. Whether you have jumped on the meal train or not, the concept of pre-packaged products shouldn’t be new to you if you have ever purchased a mutual fund through your company retirement plan or any other investment account. What do mutual funds and meal delivery services have in common? A lot, if you think about it…
Just like meal boxes that are filled with ingredients selected by a chef, mutual funds are baskets of investments selected by a manager. When purchasing a mutual fund, you are essentially hiring the fund manager to go to the market and buy investments on your behalf. You are also relying on him or her to decide how much of a particular investment is enough, just like pre-measured ingredients. The manager might be passive and choose from a pre-set menu or he might be active and buy his own ideas.
From gluten-free to Italian, meal services provide a variety of options from which to choose. Although they don’t sound so appetizing, mutual funds also come in a variety of types including domestic stocks, international stocks, taxable bonds, municipal bonds, hybrids that may include stocks and bonds and others. Certain funds may also buy other mutual funds, referred to as a fund-of-funds.
Just like with food, having a variety of investments is important for health reasons. Mutual funds typically hold a large number of investments, making them a good source for diversification. Buying multiple and different funds helps spread the risk across managers and investment types. Unlike meal descriptions that give a pretty good idea of what’s inside, mutual fund names may tell you very little about how they are actually invested. Fortunately, every mutual fund has a menu of holdings, or prospectus. Refer to the prospectus to learn more about the make-up of a fund or ask your financial advisor to take a look for you. Like ingredients, it’s important to make sure that mutual funds work well together. If you aren’t familiar with the “insides,” you could be missing out on opportunities or doubling up on similar funds, providing little diversification.
There is a cost for the professional management provided by mutual funds, known as an expense ratio. Expense ratios will vary from fund to fund and are subtracted from the fund’s value on a daily basis. In addition to expense ratios, there may also be sales charges or commissions paid, known as a load. Loads compensate the investment advisor or broker for making the fund available to an investor or for their time in making the recommendation. Loads vary by broker or advisor and it’s possible for the same fund to have a load through one advisor but not another.
The market price of a single share is referred to as the Net Asset Value (NAV), which is essentially the sum total of all underlying investments less one day’s worth of expenses (and other liabilities, if applicable), divided by the number of shares issued. This fee structure on mutual funds can make it hard to know what the total costs are, so ask your advisor if you aren’t sure.