September 28, 2020

Mutual Funds Broken Down

by Sara Wensley

Director, Growth and Marketing

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Mutual Funds Broken Down
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Here’s what you need to know about mutual funds: where they excel, where they fall short, and what kind of mutual fund alternatives might be worth a closer look.

Second only to stocks, mutual funds are likely the most well-known financial instrument around. Their ubiquity and reputation as a low-risk investment opportunity means they’re typically a go-to for people looking to store a portion of their portfolio in a conservative (yet earning) option. There are a staggering number of mutual funds available on the market, meaning that almost any kind of investor can find the right fund to include in their portfolio.

Although many people think they know all there is to mutual funds, this investment type actually has much more nuance than one might expect. The advent of exchange-traded mutual funds, passively managed funds, and other alterations to the way in which mutual funds work have all added more excitement to this kind of asset.

Here’s what you need to know about mutual funds: where they excel, where they fall short, and what kind of mutual fund alternatives might be worth a closer look.

What is a Mutual Fund?

The short definition of a mutual fund is straightforward: an investor buys shares of a mutual fund, which in turn buys shares of several stocks and bonds. If these underlying stocks and bonds perform well, each mutual fund investor gets a portion of the return that’s equal to the amount of equity they have in the mutual fund.

There are other categories that most mutual funds fall into: some are open-ended, meaning investors can invest and withdraw freely on an ongoing basis. Others are closed-end funds, requiring interested investors to put their money in up-front—getting their investment plus interest at a specified end-date. Investors can also invest in exchange-traded funds, which trade on stock markets throughout the day. ETFs offer an advantage over other mutual funds, which can only be traded at the market’s open or close (rather than continuously).

Mutual funds can be managed by a financial professional who gets a percentage of the earnings as a fee for their services, or they can be managed through algorithms that make trades based on certain market conditions. Managed funds offer the expertise of the manager and their research team, but investors end up sacrificing a part of their returns by way of a manager’s fee. Algorithmic mutual funds, on the other hand, have lower fees but do not offer the kinds of intuition-based decision-making that fund managers provide.

What Makes Mutual Funds Attractive?

Mutual funds are attractive to investors for several reasons. The first and most crucial is their relative stability: most funds offer modest, steady gains through a balanced investing approach. Funds usually include a variety of stocks, be it across a financial sector (known as sector funds) or even an entire exchange (known as an index fund) is simplicity: mutual funds offer a “set it and forget it” component to one’s portfolio. All you need to do is invest in a fund that either performs to your liking, or covers a segment of the market that you want exposure in.

Another advantage mutual funds provide is their slow and steady performance. These funds may not make outsized gains, but they’re likely to keep pace with the Dow Jones Industrial Average and the S&P 500. Mutual funds may not make you rich, but they’ll help your portfolio keep pace with inflation: that can make trendy investments a little more palatable when you know you’re making a steady return elsewhere.

Lastly, mutual funds can also provide a safe harbor for market gains. Instead of keeping your returns in your stock allocation when the market takes a dive, you can transfer gains to a mutual fund. This helps you avoid capital gains tax by not cashing out on your investment income, and doesn’t leave your money as exposed to the whims of the market.

What Makes Mutual Funds Unattractive?

Some of the very attributes that make mutual funds attractive are also some of their biggest downsides. The key reason why mutual funds might not work for you is their low returns. If you want to maximize your portfolio holdings—even those that are designed to provide a safe harbor from the whims of the market—then mutual funds aren’t likely to provide what you’re looking for. You’ll get steady returns with a mutual fund, but you won’t get anything that comes close to beating the market with one.

Mutual funds can also be a bad fit for your portfolio if you’re averse to giving up some of your gains to a fund manager, or due to fund-related fees. These fees vary between mutual funds and the investment institutions offering them, but a small percentage of a large investment adds up quickly. This is money you’re losing merely by handing it over for someone else to invest; that may leave a sour taste in your mouth depending on what you want to get out of your assets.

If you’re looking to avoid market turbulence, mutual funds might not be able to completely limit your exposure. Since mutual funds are made up of stocks and bonds, their performance is still bound to how the markets move. Granted, your exposure to market fluctuations is significantly lower with mutual funds than it is with direct stock and bond holdings, but you’re still in the markets with mutual funds.

Mutual Fund Alternatives to Consider

The benefits mutual funds provide aren’t exclusive. In fact, there are several mutual fund alternatives that offer similar advantages for your portfolio. Better still, some of these alternatives even present an opportunity to make a better return than mutual funds can.

Many of the top alternatives to mutual funds can be found in the alternatives market. Commodities are typically among the top contenders for safeguarding assets outside of the stock market, since their value tends to increase when inflation is on the rise. Gold is perhaps the best-known commodity, especially as far as investing for steady returns is concerned. Gold has a track record of retaining its value irrespective of market trends, making it a go-to for investors who may not know a ton about the alternatives market but want to place money in a safe investment.

Gold is far from the only—or even the best—alternative investment out there for making a steady return that tends to beat mutual funds. Farmland investing, like gold, stands up remarkably well against shaky markets. The value of farmland is historically consistent in bull and bear markets alike. This makes farmland investing a great option for investors that want to limit their market exposure in ways that mutual funds can’t provide on their own.

FarmTogether is the preeminent farmland investing platform for investors who want to tap into a market that provides many of the same benefits of mutual funds and commodities, but with less investor competition and even greater opportunities for larger returns. Whereas farmland investing once required investors to undertake significant research and due diligence, FarmTogether’s team of experts provide all of this information for you—making it easier to pick the right investments right away.

With FarmTogether, you can invest in a world of farmland investments across the country, each with a different rate of return and investing period to match your goals. Plus, our team is on hand to guide you through the investing process, removing any impediments you might have while diversifying your portfolio. Getting started with FarmTogether is easy and only takes $10,000 to begin. From there, you can access our entire listing of investments and reap the rewards that only farmland investing can offer.

The Last Word on Mutual Funds

Mutual funds are among the best-known options for investors who want steady returns with a moderate to low amount of risk. When you invest in a mutual fund, you’re not likely to beat the market, but you will more than likely make a return that beats what you’d stand to make in an interest-bearing account. This makes mutual funds a typical go-to when markets are mixed, or when investors want a safe place to store their market earnings.

Mutual funds are hardly the only option around in terms of storing assets for moderate gains. Investors who want to avoid market volatility have more options than they might think. This is particularly true with regard to alternative investments. The world of alternatives is made up of investment opportunities that are separate from the market—all while providing an opportunity to outperform mutual funds at the same time.

Farmland investing offers a compelling option for investors who want to generate steady revenue while minimizing their market exposure. FarmTogether makes it easy to get started.

Interested in Learning More About Farmland as an Asset Class?

Click here to see farmland's historical performance, visit our FAQ to learn more about investing with FarmTogether, or get started today by visiting ways to invest.

Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.

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