Orla O’Sullivan: Demystifying Mutual Funds

by Galia Gichon on November 12, 2009

Financial journalist Orla O’Sullivan has been participating in my Simple Money workshops and blogging about her experiences on We The Savers.  Here is her latest post on Mutual Funds.

The goal of the most recent Simply Money session was to make mutual funds not just understandable, but fun. And with the help of fund snapshots from Morningstar.com, many attendees began to see once-meaningless investment statements as valuable, applicable information.

One participant, who struggled to grasp the concept of a mutual fund, later mentioned that she and her husband had two money managers. She quickly understood the course instructor’s view that most individuals can be “self directed.” And she was shocked to learn about all the fees she might be paying, including “expense ratios,” the fund manager’s annual cut from the investment and a “load” (the charge the investor pays to buy into and perhaps exit a fund). “So that’s another fee that they get?!” she asked.

Most would-be investors – especially those with less than $250,000 to invest – don’t need the help of a money manager. Instead, they can handle it themselves by keeping their investments simple, Gichon suggested. Gichon said she has three types of savings: an emergency cash fund; a retirement fund; and a “what if” fund that she can dip into within the next seven years, should she want to make some lifestyle changes.

Six mutual funds are plenty, Gichon said. Pick them based on risk and how long you have until retirement, she said. The typical fund is already diversified and invested in hundreds of companies. Also, standard age-related guidelines exist on what share of one’s investments should be in company stocks, government bonds and other types of funds.

The bottom line: invest in no-load funds, Gichon counseled, since paying a load doesn’t mean better returns; and invest in funds whose expense ratio falls below the 1.5% average.

Orla O’Sullivan is a New York-based journalist whose work has been widely published in business and consumer media on both sides of the Atlantic.

Read more about Orla’s participation in Galia’s Simply Money workshops.

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