Investing in Mutual Funds – Overview
Buying mutual funds is a great investment strategy to use, no matter what your intended purpose is.
Mutual funds can hold all the benefits of stocks, bonds, and other investment vehicles, but still offer a buffer from the inherent risk.
They can be long-term, short-term, safe, or risky. They are commonly used for retirement accounts and are great for beginners or savvy investors.
Mutual funds are an important component of a strong investment portfolio, so everyone should consider them at some point in time.
Luckily, buying mutual funds is not a hard process, but there are certain things to consider before making the plunge.
Here are 5 ways to get started with buying mutual funds:
1. Decide on the duration of your investment
The duration of your investment can have a huge impact on the funds you choose and your ability to profit.
Buying short-term mutual funds are typically more risky, while long-term funds usually have more stability (but may not be as profitable).
If you have a plan for the exact amount of time you will be investing (retirement, paying for college, buying a new house), you can use that to guide your purchase decision.
Many funds are specially targeted for a specific withdraw date (this is an especially popular option for retirement funds and college savings), so it can make getting started easy.
2. Evaluate your risk tolerance
Deciding upon your risk tolerance is an important step in buying mutual funds.
The riskier you are, the more you stand to profit, but you also stand to lose the most. If you are really risk-averse, you will want to look towards a well-diversified mutual fund.
Many mutual funds are known for being diversified, safer investments, but there are also some that have a very narrow focus and thus are a riskier bet.
When looking to invest in a mutual fund, some factors that can help you determine the risk include:
• The size of the fund
• How long the fund has been around
• The number of stocks, bonds, or other funds within the portfolio
• The sectors that those investments cover
3. Pick an industry, sector, or group you feel comfortable with
When buying mutual funds, the more you know, the more educated your decision will be.
If you have a special interest in a particular industry, group, or sector and you think they are on the path to profit, then consider an industry-specific mutual fund.
In general, these funds are considered to be riskier since they are usually not as well-diversified, but depending upon the industry, your results will be different.
Here are some examples of common sector mutual funds:
• natural resources
• real estate
• health care
• alternative energy sources
4. Consider index mutual funds
Index mutual funds are a great way to get started at investing in mutual funds because many follow a specific set of rules or indexes that are predetermined.
One of the biggest advantages of these funds is that the cost to manage them is typically less (since they do not require advanced judgment calls), which is usually reflected in the fees you are accountable for.
Mutual fund fees can have a huge impact on your overall profit, so it is a consideration worth making.
Here are examples of common index mutual funds:
• Standard & Poor’s 500 Index
• Total Stock Market Index
• Emerging Markets Index
• Nasdaq Composite Index
2. Look to the experts
No matter how easy buying mutual funds may be, you still could be making more if you consult an expert. Most brokers spend each and every day following the stock market, so they have a better idea of trends, fees, and associated risks.
While most experts do charge you, they are still working hard for you to make money so you still stand to gain a lot.
Even if you do not directly pay a broker to manage your investment portfolio, you could learn a lot by educating yourself using free resources (especially online).
Many financial companies will also offer free guidance if you are investing with them, so check with what is offered before making a final decision.
Buying mutual funds can be simple if you educate yourself properly, so getting started does not need to be difficult.
Mutual funds are an important part of every person’s investment portfolio, so you should not ignore them as a potential investment vehicle.
While many are known for their diversification, there are still others that are very focused. Remember to consider your risk tolerance, planned duration of investment, and level of education before making a decision.
There are thousands of options, so if you follow these steps you should be able to find the perfect fit.