How To Invest In Mutual Funds

 

A mutual fund is a collection of investment assets packaged as an investment. Mutual funds allow investors to deposit their money to invest in a diverse portfolio of stocks, bonds or other assets. They can be a great way to approach the stock market and other types of asset classes.

Here are some things to keep in mind when starting out, if this is your first time investing in mutual funds. By the time you have read this article, you will have understood each of the following steps.

6 Steps to Investing in Mutual Funds Decide between active and passive funds. Determine the cost ratio and other expenses. Consider the difference between stock and bond-based mutual funds. Find out the minimum investment requirements. Open a brokerage account.

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1. Active vs. inactive funds

First, you need to understand the difference between actively managed vs. passively managed mutual funds. An active mutual fund employs managers who choose to invest in the fund. A passive mutual fund only tracks a benchmark index, such as the S&P 500. The purpose of an active mutual fund is to beat the performance of a particular index, whereas the purpose of a passive mutual fund is simply the same. For this reason, inactive mutual funds are also called index funds.

In practice, however, the majority of active mutual funds do not beat their benchmark index. Some of the best are active mutual funds, but it is important to keep a close eye on the fund's track record before investing.

2. Expenditure ratio and other expenses

Second, you need to know the value of a mutual fund. The basic type of fee you should be aware of is the expense ratio, which is the percentage of the fund's assets that leads to the annual fee. For example, a 1% expense ratio means you're paying $ 100 in an annual investment fee on a 10,000 account. Inactive mutual funds (also called index funds) have a spending ratio of 0.03% -0.25%. Functional mutual funds have a higher proportion of expenses as they incur additional costs of paying investment managers.

Some funds receive a sales commission, which is called a sales burden or just a burden. Front end load is a commission you pay when you buy funds, while back end load is a commission you pay when you sell. That said, there are a number of great new load mutual funds on the market, so you should generally avoid sales load mutual funds.

3. Stocks vs. Bonds

You can find mutual funds that invest in a variety of asset classes, but most invest in either stocks (equity) or bonds (fixed income). Investors generally have something in their portfolio. Older and less risky investors should generally pay more attention to bonds. On the other hand, young investors are better off maintaining high stock heavy allocations.

A good rule of thumb is to take your age and reduce it to 110 to get an idea of ​​your appropriate stock distribution. For example, if you are 40 years old, you should have about 70% capital in stock, the remaining 30% in bonds or fixed income investments.

4. Decide how much to invest.

There are a few factors you should consider when considering how much to invest. First of all, most mutual funds have minimum investment requirements. For example, one of the most held active mutual funds, the Dodge & Cox Stock Fund (NASDAQMUTFUND: DODGX), has a minimum initial investment of 500 2,500 for standard accounts and if you invest through IRA The minimum is 1,000. The additional investment must be at least 100. Be sure to at least check the fund before investing.

The second consideration is how much of your portfolio should be in mutual funds, and it depends entirely on your financial needs. If you want to keep your investment in autopilot, there is nothing wrong with having a portfolio consisting entirely of mutual funds. On the other hand, if you also want to buy stocks, mutual funds can help build a good "foundation" for your portfolio.

5. Open an account.

When it comes to buying mutual funds, you have two choices. First, you can open an online brokerage account and place your mutual fund order there.

The brokerage route is a great choice if you want to own the mutual funds of many different firms, and it can help to keep the portfolio of mutual funds and stocks in one place. A brokerage account is also a good option if you are not sure which mutual funds you want. Many top online brokers have the best mutual fund screening and research tools.

Alternatively, you can open an account and buy mutual funds directly through the companies that offer them. For example, if you want to invest in a mutual fund offered by T. Rowe Price (NASDAQ: TROW), you can do so directly through the company.

6. Keep an eye on your mutual funds after you buy them

Finally, it is worth talking about what you should do after investing in mutual funds. In particular, it is important to review your portfolio from time to time and keep a balance when needed. Through the natural process of market movement, you may find that the distribution of your assets changes. For example, if you are targeting to allocate 60% stocks and 40% bonds with your mutual funds, strong stock market performance could push it to 70% and 30%. In order to keep your portfolio risk level in line with your situation, it is important that this check-up be done every year or so.

Stupid bottom line

Most importantly, mutual funds can be a great source of long-term investment without having to worry about choosing individual stocks and bonds. By understanding the basic concepts discussed here, you will be ready to build your own rock solid mutual fund portfolio.

Mutual Fund Frequently Asked Questions

Anytime is a good time to invest in a great fund. Don't try to spend time in the market.

If you are looking for an easy way to diversify your portfolio, investing in a mutual fund is a good choice. If you want a relatively safe investment, choose a passively managed mutual fund (also called an index fund) that tracks large indexes such as the S&P 500.

Mutual funds are a group of investment assets that are packaged in a single investment. In other words, you only buy shares of one fund through your brokerage, and you automatically own shares of several companies.

If this is your first time investing in a mutual fund, you will need to open a brokerage account. Start there and ask your brokerage for specific guidance.

There is no position in any of the stocks mentioned by Matthew Frankl, CFP®. Motley Fool has no position in any of the stocks mentioned. Motley Fool has a disclosure policy.