How to Diversify Mutual Funds for a Trust

4 of 7 in Series:
The Essentials of Holding and Diversifying Trust Assets

In a mutual fund, a group of like-minded investors pool their money, hire an advisor, and allow the advisor to invest the pooled cash in a way that’s been determined by the investors. In exchange for the cash, the individual investors receive shares in the fund, not shares in the individual investments that are purchased and sold by the fund.

By their nature, mutual funds are diverse and specialized. You can buy funds made up entirely of stocks or ones that only invest in bonds. You can purchase international funds, municipal bond funds, socially responsible and green funds, and funds that specialize in transportation companies.

When diversifying a trust’s assets, mutual funds can be a very savvy trust investment. In exchange for the fees that every shareholder, either directly or indirectly, pays the fund manager, you receive expert advice as well as the potential for great diversification. In fact, you may become so caught up in picking and choosing mutual funds that you lose sight of your goal of diversifying the trust’s principal and investing in all sectors of the economy. Before you invest in any mutual fund, check its prospectus very carefully to make sure that you understand what you’re buying.

Just make sure that you’re careful about the fund’s fees when investing the trust’s money in mutual funds. Funds are allowed to charge a variety of fees, including sales charges (sometimes referred to as a load), redemption fees, exchange fees, account fees, purchase fees, management fees, and/or distribution (sometimes called service) fees.

You can reasonably expect to pay a fee for having someone invest your money for you, but you need to figure out upfront how much of a fee you’re willing to pay. So-called no-load funds, which have no upfront or deferred sales charges, sound like a good deal, but make no mistake: Even no-load funds charge fees — you just may not be able to see them.

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