To help you understand the concept, imagine that an asset management company called Sound Investments created a mutual fund management subsidiary and has it sponsor three new mutual funds:
The Sound Investments Stock FundThe Sound Investments Bond FundThe Sound Investments Real Estate Fund
Each of these mutual funds is unique and has its own investment portfolio. In most mutual fund families, each fund is run by separate portfolio managers, who are obviously focused on different investment strategies. All three would be part of the Sound Investments fund family. One investor investing in Sound Investments would have access to all three of these funds.
How Mutual Fund Families Work
There are many potential benefits of investing within a mutual fund family rather than diversifying assets across multiple mutual fund companies. When done correctly, investing across a mutual fund family can offer asset class diversification and potentially lower your investing costs. It may seem somewhat inefficient to create multiple mutual funds, but mutual fund families are very effective. For example, if a fund manager were to sit in a room all day and value companies, running multiple mutual funds wouldn’t take much more effort than running a single mutual fund, because their buy-and-sell decisions could be based on the type of stock or other security they’re examining. Suppse this same manager were to run four different mutual funds for a major mutual fund family:
The Vice Fund (alcohol, tobacco, gambling, and defense stocks)The Blue-Chip Dividend Fund (companies with high dividends and strong balance sheets)The International Value Fund (companies that are undervalued and located outside of the United States)The High-Quality Intermediate Corporate Bond Fund (bonds of highly rated corporations)
If the fund manager is reading the report of a company such as Diageo—the owner of many popular beer and liquor brands—and it were undervalued at the time, they might be able to put in buy orders for the first three funds. That’s because it would be appropriate to have the company included in the vice fund, the blue-chip dividend fund, and the international value fund. However, a company such as Berkshire Hathaway wouldn’t qualify for any of the funds, because it isn’t a vice stock, it doesn’t pay dividends to shareholders, and it isn’t based overseas. The advantage is that it allows individual shareholders to decide for themselves the types of assets that are most appropriate for their portfolios. Large mutual fund companies, such as Vanguard and Fidelity, have dozens of funds covering nearly every possible asset class, asset allocation, and investment strategy you can imagine.
Pros and Cons of Investing in One Mutual Fund Family
Pros Explained
Higher comfort level: When you stick with one fund family, you become familiar with that company’s management and investing style. That can create trust and make you more comfortable choosing funds. Most fund families have a wide array of investment options.Lower costs: Because you have multiple funds within the same family, selling and buying shares across the family will generally cost less than investing in funds with different companies. Some funds will even allow shareholders to invest in other mutual funds within the mutual fund family at lower minimum levels.Easier to diversify by investing in multiple funds: You can usually set up your account to withdraw money from your bank and automatically disperse it across several funds within the same family at no extra charge.May have special fund access: In rare cases, you might be able to invest in a “closed” mutual fund that isn’t accepting new shareholders due to an existing investment in a mutual fund family.
Cons Explained
Slightly higher potential for losses: There is always a chance that a mutual fund company could go bankrupt, leading to some losses if all of your investments are in one place. However, fund investments of up to $500,000 purchased through a brokerage are insured under the Securities Investor Protection Corporation (SIPC). In most cases, the Investment Company Act of 1940 protects mutual fund money from creditors, because mutual fund assets are held independently from the company itself. Limited to a single investment style: Certain fund families may adhere to specific styles of investing. If you’re not exposed to other fund families, you could miss out on different approaches. Mixed performance: Just because the large-cap fund in a particular fund family performs well, that doesn’t mean its international fund will. Be sure you know how any individual funds perform before you invest in them.
What It Means for Individual Investors
Finding and investing in a mutual fund family can take the hassle out of investing, giving you a variety of funds all in one place. Many people also appreciate the comfort and convenience of investing with a big-name brokerage house. Remember that just because it’s convenient, that doesn’t mean a fund family is the best place to put your money. Make sure the benefits that you’re receiving balance out the limits of restricting your investments to one fund family.
