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Mutual Funds, What are They? David Cross, US-AM

By David Cross, CPM®, CRPC®, CDFA®

By David Cross, CPM®, CRPC®, CDFA®


What is a mutual fund?

Mutual funds were invented over 100 years ago to serve the needs of small investors and they are still popular today.  A mutual fund is like a basket of usually 50, 100, 200 or even 500 stocks or bonds.  It is an investment that allows you to buy a broad mix of investments so that all of your money is not concentrated in 1 investment.  The funds will usually hold stocks or bonds in various concentrations usually from 1% to 5% in each company.  Mutual funds come in an almost infinite variety of choices.  See below for just some of the fund types:

Large Company Value Large Company Blend Large Company Growth
Mid Cap Value Mid Cap Blend Mid Cap Growth
Small Cap Value Small Cap Blend Small Cap Growth
International Large Value International Large Blend International Large Growth
Emerging Markets International Small Cap International Mid Cap
Sector Funds (like food or aerospace funds) Bond Funds (treasury, corporate or municipal) International Bond Funds
High Yield Funds (Junk Bonds) Growth & Income Funds (a blend of stocks and bonds) Target Date Funds


Besides diversification, mutual funds have some other advantages including:

Professional Management – Mutual funds are managed according to a specified plan in the prospectus (the legal document governing the fund). Usually, the team has specific expertise in the particular area that the fund invests and that team may not be available to you any other way except through the fund.

Low minimum investment – Some funds have minimums as low as $50 so that even small investors can participate in the fund.

Liquidity – With few exceptions, the majority of mutual funds can be sold and converted to cash in 1 business day.  This means that if you have an emergency, you can get to your money very quickly.  If you had your money invested in your private business and needed to pull out money, you would have to find a buyer for a piece of your business and they may not be willing to offer a fair price on short notice.


There are 3 ways you can make money from a mutual fund:

1) Dividends: Mutual funds distribute any income received from dividends and interest to shareholders AFTER management expenses.  For example, if a fund earned 2% in dividends but their management fee was 1%, you could expect to receive a dividend of 1%.

2) Capital Gains: If the fund bought some investment at a low price and then sold them later at a higher price, then the fund has capital gains.  If you owned the fund when the fund sold the investments, you will likely receive a capital gain distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. If you bought the fund at $10 per share and it rose in price to $13, you could then sell your shares for a profit of $3 per share.

For more information click here for an informative video from Investopedia http://www.investopedia.com/video/play/openend-fund/?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.  The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.


David Cross is a wealth advisor with U.S. Asset Management, a Registered Investment Advisor. He holds the designations of Certified Divorce Financial Analyst, Certified Retirement Planning Counselor and Certified Portfolio Manager.

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All views/opinions expressed in this article are solely those of the author and do not reflect the views/opinions held by Advisory Services Network LLC.  Advisory Services offered through U.S. Asset Management, a member of Advisory Services Network, LLC.

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U.S. Asset Management is a fiduciary advisor offering portfolio management and financial planning services. We help clients make better decisions with their money and assist with overseeing every aspect of their financial lives.  David Cross is a Certified Portfolio Manager, Certified Divorce Financial Analyst and Certified Retirement Planning Counselor.

U.S. Asset Management and Advisory Services Network, LLC do not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  Financial data changes rapidly.  All economic and performance data is historical and not indicative of future results.  This material is of a general nature and intended for educational purposes only.  This information does not constitute a recommendation or solicitation or offer of the purchase or sale of securities.   Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.