Mutual fund investors pool funds together to purchase a broad range of stocks, bonds and other assets mostly through a company. Mutual fund investors don’t directly own the stock in the companies the fund purchases, but they do share equally in the profits or losses of the fund’s total holdings — hence the “mutual” in mutual funds.
There are thousands of mutual funds available that pursue a very wide variety of different investing strategies. This can make understanding the space challenging for new mutual fund investors.
Here are steps you can take to help you get started when investing in mutual funds.
Decide on your mutual fund investment goal
Just like any other investment, before you invest your money in mutual funds make sure you have a clear investment goal. It could be long term or short term. This gives you clarity on the type of mutual fund you should go for.
Long-term goals like retirement and college funds should drive you towards stock-based mutual funds. With this option, you have time to go through the ups and downs of the stock market. Mutual funds offer a safer option compared to others because you invest in a range of companies and debt.
If your goal is mid-term, between 5 to 10 years, you should opt for a balanced mutual fund. It invests in both stock and bonds, offsetting some of the risk associated with stocks.
A money-market mutual fund or government bond fund might be a good option if you have a short-term goal, like buying a car or a home.
Research potential mutual funds
A Tool like mutual funds observer is great for researching potential mutual funds to invest in. They provide detailed information on different mutual funds in multiple categories.
These are factors to consider, that will help you create your list of mutual funds choices:
- Past performance: A fund’s past performance is an indicator of how well the fund is meeting its stated goals. However, this does not guarantee its future success. Compare past performance to similar mutual funds.
- Expense Ratios: These are annual fees that compensate the fund’s manager and cover the cost of buying the fund’s investments. It is important to pay attention to the expense ratio, whether it is less than 1% or 2% because they can impact your money’s growth over time.
- Load fees: The commissions charged by the broker who sells you a mutual fund is referred to as the load fees. While some mutual funds have them others don’t. For a beginner, you should aim for one that doesn’t have them.
- Management: Decide if you want your mutual funds to be actively managed or passively managed.
Actively managed mutual funds aim to beat the performance of an underlying index. They usually charge higher fees and offer the potential for richer returns. Passively managed mutual funds—or index funds—aim to duplicate the performance of an underlying index. They typically charge lower fees than actively managed funds.
Historically, passively managed index funds have outperformed actively managed funds over the long term.
Open an investment account
If you already have an employer-sponsored retirement plan you already have access to mutual funds. Most employer-sponsored plans direct your funds towards mutual funds rather than investing directly in stocks or bonds.
If you don’t have access to an employer-sponsored retirement account or are investing for a goal outside of retirement, you can invest in mutual funds by opening a brokerage account on your own and investing in the following plans:
- Individual retirement accounts: An IRA account is a tax-advantaged investment account that helps invest in mutual funds for retirement.
- Taxable brokerage accounts: This account is suited for goals you want to achieve before retirement, although they lack the tax benefits of an IRA, you can make withdrawals at any time without paying penalties.
- Education savings accounts: This account enables you to plan for university education for your children. You can invest in mutual funds in the long-term to help you achieve this.
Purchase shares of mutual fund
After you open your investment account, the next step is to fund it with just enough to meet the minimum entry fund for your mutual fund investment.
Although the minimum entry fund for some mutual funds might be higher than other asset options like stocks and ETFs, it still offers the option of buying fractional shares of the mutual fund. It is also suitable for long-term investments.
Set up a plan to keep investing regularly
To be able to reach your goals and grow wealth then you should establish a plan to help you keep investing. Your brokerage trading platform can help you set up recurring investments on a daily, weekly or monthly basis so you don’t have to remember to deposit money into your account every time you want to invest.
This helps you pay less per share over time and helps you reduce the risk of buying a lot of mutual fund shares when prices are extremely high. This also offers you the opportunity to buy more shares when prices are low.
You should also set up a plan to check in on your investments at least once a quarter, this will give you the chance to rebalance your portfolio and makes sure that its asset classes still match the level of risk you want to take to meet your goals.
If this is daunting for you, you can join our community by joining our mailing list to learn more about how our services can help you achieve your goals.
Consider an exit strategy
When you meet your investment goal or retirement, you’ll want to sell your shares or make withdrawals. You’ll have to make a plan to help you minimize the taxes you owe especially if you’ve not held your investment in an IRA. Speaking to a financial advisor or tax professional is one way to help you create a good exit strategy.