At the heart of our investment process are the tools we use. Most are mutual funds. In discussions, we often gloss over this fact and cut straight to how the funds are allocated. Here, we will take a step back and review some mutual fund basics.

What is a Mutual Fund?

A mutual fund is a vehicle that allows large groups of investors to pool their money together to purchase investments.

Why Do We Buy Mutual Funds?

• Diversification. Mutual funds allow investors to cheaply and easily diversify their portfolios across companies, regions, countries, etc.

• Affordability. As of October 17, 2018, the cost to own one share of DFA US Core Equity 2 (DFQTX) was $22.09. DFQTX holds 2,862 stocks. Purchasing just one share of any of DFQTX’s top five holdings would cost much more.

  Moreover, DFA charges its investors just 0.22% to manage the fund. The trading costs for an investor to recreate and rebalance DFQTX with individual stocks would dwarf DFA’s management expense.  

• Allocate Efficiently. Stock prices make it difficult to allocate among stocks. Today, one share of Amazon costs nine times more than one share of Apple even though Apple is a more valuable company. Mutual funds provide stock exposure in line with the fund’s target weightings.

• Liquidity. Most mutual funds are highly liquid. An investor who sells a mutual fund before market close will have cash a day later.

How Do Mutual Funds Earn Investors a Return?

Mutual funds pass through the benefits of their underlying investments.

Daily after the market closes, the mutual fund company measures value changes of the underlying investments. It then adjusts the fund’s price to reflect an increase or decrease in the investments’ value.

Additionally, when investments pay dividends, the fund company collects those dividends and periodically distributes them to its investors.

How BEW Uses Mutual Funds

There are thousands of mutual funds with many different investment categories, characteristics, and philosophies. BEW identifies which mutual funds best match our investment strategy. Then, we determine how to allocate our clients’ capital among those mutual funds.  

How we allocate is a discussion for another quarter. For now, hopefully you have a better understanding of what a mutual fund is. Please let us know if you have any questions or if you would like to discuss further.