Investing 101: What's a Mutual Fund?
Sit back, relax 😌 We’re going to tell you a story from the good old days.
Back then, if you wanted to watch a movie you couldn't simply stream it on your computer with a few clicks 🖥 You actually had to go to a shop to find a physical copy of the film you wanted to hire out, take home, and watch. If they didn't have the movie you wanted... too bad! 😥
In the early 2000's, way back when, there was a company called Blockbuster, and they were the ones to beat in the movie-rental game. Every town, or even village, had a Blockbuster, and in the pre-streaming days business was booming 💥
I was already keen on investing back then… and on movies too! So I watched Blockbuster’s growth with interest 🧐 I saw the dawn of another new technological advance (Blu-Ray) on the horizon, and I decided to buy some Blockbuster stock. As a relatively novice investor, I decided to put all of my investment fund (little as it was) into Blockbuster.
Now all I had to do was sit back, wait for Blu-Ray to change the game in home entertainment, and watch the money pile up 🤑
Things didn't exactly go to plan though 🤦♂️ Contrary to my prediction, it was Netflix and fast internet that changed the home entertainment industry, forever 🎥 No one wanted to spend their Friday night in a store fighting over which movie to watch anymore (they could now do this from the comfort of their own home).
In 2010 Blockbuster filed for bankruptcy, and the value of the stock I had bought with the money invested went to 0 📉
My sorry tale demonstrates the inherent danger in stock picking. If you have all your eggs in one basket and something goes wrong, you have no Plan B 🐣
Luckily for me, there are now financial mechanisms that exist which can help prevent me from falling into this trap again.
One example is a mutual fund. This is a financial vehicle, often operated by professional money managers, which allows people to contribute their money into a shared pool. This money is then invested in a combined portfolio of shares, bonds, or any other financial instruments 👨👩👧👦
The key benefit of a mutual fund is that it allows you to pool your money with other investors, which means you can take advantage of a more diversified portfolio. A mutual fund will typically hold a portfolio containing hundreds of different securities at any time, so the risks are spread 🍰 Therefore if one company in the portfolio has a bad quarter, you don't stand to lose a great deal because only a small proportion of your overall investment is tied to that specific company.
Mutual funds can be operated by professional money managers, who actively pick what shares or bonds are in the fund, and also decide the most appropriate mix of each asset class. This allows you to tap into the wisdom of professional investors, and hopefully jump-start your own journey by standing on the shoulders of giants 👆
Another common approach employed by mutual funds is to track an index. For example, rather than relying on an investment manager to try and pick winners (which, as we saw from the Blockbuster case study above, can be a tricky task 🤷♀️), you can invest in a bundle of stocks such as the S&P 500. This allows you to spread your investment across the 500 largest companies in the US, with the mindset that you’re not trying to outperform the market, but aiming for the same returns instead.
We have designed Plum to offer a simple introduction to investing, and as such we provide a range of mutual funds to choose from, depending on your appetite for risk.
If you'd like to learn more about Plum then you can check out our website.
Remember, your capital is at risk if you choose to invest.