What is a Mutual Fund Anyway?

You’ve undoubtedly heard the term, mutual fund, but is it one of those terms you’ve heard so much that you’re afraid to ask what it actually is? Almost all investments within retirement accounts – 401(k)s, 403(b)s, etc. – are mutual funds so you own one or more of them already. Below is what they are, how they work, and a quick dive into a popular fund held by many UK faculty and staff – Fidelity Contrafund.

What is a mutual fund? A mutual fund is an investment vehicle made up of a pool of money collected from many investors to invest in financial securities like stocks, bonds, and other assets. So, when part of your paycheck goes to your 403(b), your money purchases shares in whatever mutual funds you have chosen. (You choose the mutual funds where your money goes, not your employer) The mutual fund then pools your money with that of other investors and purchases stock in the types of companies the mutual fund specializes in. For instance, Fidelity Contrafund purchases large, U.S. companies that they expect to grow.

Buying shares of a mutual fund rather than stocks of individual companies allows an individual investor to diversify their own portfolio at a relatively low price. A fund’s price is referred to as the Net Asset Value (NAV) of the fund and is derived by dividing the total value of all the securities held by the fund by the total amount of shares of the mutual fund.

FLCNX is the ticker symbol for Fidelity Contrafund available through UK’s Fidelity retirement option. You can enter that ticker symbol into, say, Yahoo Finance, and see current information on the fund. Fidelity Contrafund owns portions of the stocks of 388 different companies and is classified as a fund that primarily owns companies worth more than $10 Billion and that “are poised for growth.” Over 93% of the companies the fund owns are based in the U.S., with the top 10 largest holdings comprising over 45% of the fund’s total assets. Included are companies such as Facebook, Amazon, Berkshire Hathaway, Microsoft and Apple. The total value of the fund – all investors’ funds pooled together – is $23.8 Billion.

Performance: Mutual funds derive their returns from dividends paid by the individual company stocks they own and when the prices of the stocks they own increase, or decrease. Mutual funds pay out almost all the income it receives in the form of distributions. FLCNX pays its distributions twice a year – February and December.

Over the last 3 years, FLCNX has earned an average annual return of 20.37% - that includes both dividends from the companies it owns and share price increases. The FLCNX benchmark – the S&P 500 – earned an average annual return over that same time period of 18.67%.

Please note this blog is not an endorsement of Fidelity Contrafund and that, of course, past performance may not be indicative of future results.

Steve Byars, CFP®