Are Mutual Funds Different From Stocks?

Similar to how a share of a stock is a small percentage of ownership of a company, buying a share of a mutual fund is purchasing a small percentage of ownership of a pool of money that is used to buy a variety of stocks. The benefits of this are both the scale at which it operates and the expertise of the managers who run it on your behalf.

An example of these benefits is a US Small Value mutual fund that I personally own. While I only have a handful of shares, through this one fund I am actually invested in over 1,000 different companies across the US. I want to build for myself a diversified holding of stocks, but it is in no way practical for me to buy a single share of each of those 1,000 companies to get that exposure. On the other hand, that mutual fund is run by a company with around a half of a trillion dollars invested with them, so they can easily purchase shares of those 1,000 companies and spread the expenses very thinly between each of the investors.

In addition to scale, mutual funds also offer their considerable expertise in building a better portfolio of stocks than what an individual investor might be able to do on their own. That US Small Value fund I mentioned isn't simply buying shares of small, US companies that are relatively cheaply priced (called "value" stocks), but they also tilt the weights of the stocks in their portfolio to lean more heavily on companies that exhibit characteristics that research has shown are more likely to outperform the market as a whole. This is the reason that particular fund has performed better than its benchmark since it was started nearly 25 years ago.

So that's a quick overview of how mutual funds differ from stocks, and we think these funds are a key component for building a more efficient, well-diversified portfolio that helps lower risk while capturing growth in the market.