For many investors, mutual funds are a more convenient and economical way to expand or diversify an investment portfolio. Because mutual funds typically spread out money over several different types of assets, they tend to represent a lower-risk option that appeals to many people. If you have been thinking about investing in mutual funds, you may be wondering what to do. If so, read on to learn more about how to invest in mutual funds.
What Exactly Are Mutual Funds?
Of course, before you invest in anything, it’s important to know what you’re talking about. So, what are mutual funds? Simply put, mutual funds are a managed portfolio of stocks, bonds or other assets. Investing in mutual funds means that rather than investing in one stock, you are putting your money into a collection of stocks and other assets. Depending on the type of mutual fund you have, these investments might be managed rather strictly, or they may be left relatively alone. Because of their diversity, more mutual funds are considered a safer bet than individual stocks, as they are spread out in such a way that poor performance in one area of the market will not necessarily make that much of an impact on the overall fund.
How Do You Pick the Right Mutual Fund?
So, the first step in mutual funds investments is to do your research. There are almost as many mutual funds as there are available stocks to buy, so spending the time to make the right choice is key. In addition to the level of management mentioned above, different types of funds target different areas of the market. Equity funds, for example, are mostly stock-based. Many equity funds are specifically aimed at certain sectors, like technology stocks or financial firms. Other funds go after government securities, bonds and other things. Balanced funds tend to have a decent mix of different types of assets.
Another thing to consider is taxes. Depending on the type of fund you choose, you may be required to pay taxes every year based on your dividends, or you may be able to defer taxes until a later point.
A third thing to think about is risk. While mutual funds are usually considered a lower-risk option, there are some funds that can be riskier, but offer more potential for return. If you’re willing to chance it, a higher-risk fund might be the way to go.
How Can You Purchase Mutual Funds?
If you think that investing in a mutual fund might be the way to go, you have several ways to go about it. Many mutual funds can be purchased directly from the fund company itself. Vanguard, T. Rower Price and Fidelity are examples of fund companies that will sell directly to you. In many case, this is a cheaper way to go, as buying directly from a fund company cuts out the middleman and alleviates many of the fees associated with dealing indirectly.
Another option when buying mutual funds is to go to a fund “supermarket” — an investment or brokerage firm that gives you access to a wide variety of mutual funds. While this can be beneficial to diversifying your portfolio and giving you a wide range of options, in many cases the fees for some funds will be substantially higher than others, as the brokerage firms will try to steer you towards funds that they themselves own. This doesn’t mean that mutual fund supermarkets should be a deal breaker, but it does mean that you should be careful and make sure you know upfront what you’re paying and why.
A third method of mutual fund investment is through a broker or investment manager. Doing it this way gives you access to a manager who is trained and knows the market well, and often this can be a good thing. At the same time, though, investment managers tend to tack on fees and commissions, so once again it’s important to do your research and know upfront what is expected of you.
A fourth option for buying mutual funds is online. Online brokerage firms like E-trade have gained immense popularity over the past couple of decades, and in most cases buying from them is as simple as pointing and clicking. What’s more, they offer tools to help you research, and the resulting transaction fees are some of the lowest in the business.
As you can see, there’s a lot to think about when investing in mutual funds. However, armed with knowledge and a strong idea of how your money can best work for you, mutual funds can be a solid addition to your investment portfolio.
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