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What is a Mutual Fund?

What’s a mutual fund again?  Oh yeah…mutual…wild kingdom.  Mutual…….of Omaha’s Wild Kingdom.  Not a mutual fund.  Yeah, but Omaha…Warren Buffett…or is that Peyton Manning’s tag line…or is that Brad Paisley?  Wait…that’s an insurance company.

OK…back to mutual fund.  Sounds like some fancy Wall Street lingo..and it is.  But you probably already own a mutual fund or two in your 401k.  

Let’s break it down.  Mutual…something you do together with others, a mutual experience…or something you have in common…like a mutual friend.  In this case, it’s a fund.  

A fund, a pool of money, that you’re sharing with others.  Let’s say you and your co-workers are chipping in to buy something for your boss.  You’re each contributing to the boss’ gift fund, mutually.  A mutual fund. 

Or you and your siblings are setting aside $100 a month to buy your parents a 50th anniversary cruise next year.  You’re mutually funding the cruise.  A cruise mutual fund.

Or when me and my brother were kids, we used to ride our bikes up to the shopping center and go to Toy King.  We wanted to check out the latest Matchbox cars and add to our collection.  Individually, we didn’t always have enough to buy a car on our own.  But if we put our allowance and lawn mowing together, we’d have enough to buy at least one or two.  We put together our Matchbox mutual fund.

And if we got our two friends from down the alley to join in, Bobby and Coggin, we could pool their money with ours and buy a half dozen cars.  Way more than we could do on our own.  

That’s kind of what happens in the investing world.  On our own, we might not have enough money to buy even one share of stock.  Think Apple, Netflix, or any company trading in the several hundred dollar range.  But together, mutually, we can pool our money and buy a lot more stocks than we could alone.

Of course, a professionally managed mutual fund is subject to rules and regulations and fees and expenses...a topic we’ll cover another time.