For anyone looking for a simplified explanation of a mutual fund, it is a group of smaller investments that have been grouped together under one umbrella to work for your benefit. Instead of trying to invest in a bunch of smaller companies on your own you can invest in a mutual fund that invests in those companies so that you have your hand in each of them, but don’t have to manage what is going on with them actively. This is one of the reasons that mutual funds are often considered among the best ways to start investing, but it is far from the only reason. My biggest hope here is that you will take the time to read through this entire post and that you will soak up all of the free knowledge I am about to share with you. While I’m hopeful that you will read through everything I’m afraid that you won’t, and to be entirely clear that would be a mistake on your part.
Why would I be worried that you won’t read through the entire post? The reason is simple, it’s about mutual funds, and mutual funds are honestly one of the more boring investment opportunities you are likely to come across. But just because they are boring doesn’t mean that they aren’t a good investment, in fact, I would say the exact opposite is true. Why would I be going over a topic that a lot of people find to be dull? Well, the reason is that for anyone looking at investing the money instead of just saving it, then mutual funds are a great starting point. They are one of the best and safest ways to invest your money even if you are uncertain of how the market works and how to invest properly.
While mutual funds are one of the best ways to invest your money that doesn’t mean that they are completely foolproof. If you put your money into the wrong mutual fund, you could still incur substantial losses. Today I’m going to be launching a 4 part series on mutual funds that is meant to educate you on their benefits as well as any potential risks involved. Today is a beginner’s class on what mutual funds are and how they can be your gateway to the world of investing. After a quick introduction, I’ll get into some more common stuff as well so that you can get a better grasp of the subject matter.
Here Are The Topics:
1. A Guide To Mutual Funds For The Beginner
2. Understanding The Cost Of Mutual Funds
3. How To Pick Winning Mutual Funds
4. Five Mutual Funds To Get Started With
Sound good so far? Well, then let’s get started.
What Is A Mutual Fund And Why Can It Help You With Investing?
A mutual fund is a fund that combines the money of multiple investors to use those combined funds to invest in a variety of different areas. One of the primary advantages that mutual funds offer is that they automatically diversify your holdings, which is one of the key ways to keep your money safe. For example, let’s say that your mutual fund has money in 100 different stocks. Let’s then say that one of the companies goes under making that stock worthless. Well, in that case, you have only lost a small percentage of your money. On the other hand, if you had all of your money invested in that single stock then you would have lost all of your money when the company went under. The downside of mutual funds is that there are costs and fees associated with them that can eat into your profits over the long term. The other downside is that mutual funds control the timing of gains and distribution of income which can limit an experienced investor and keep them from maximizing their profit.
Different Types Of Mutual Funds
A significant benefit of mutual funds is that they provide an easy way to invest for either short or long term goals with almost any amount of money. Believe it or not, you can start out a mutual fund with as little as $50 in automated monthly contributions, or a $500 one time investment. The bad news here is that there are a lot of mutual funds out there so being able to choose the right one can take quite a bit of time and research. Morningstar, which is the leading source of mutual fund research currently tracks over 15,000 funds. So how can you narrow the field down so you can pick the right one? First, you have to decide if you want an open-ended fund, close ended fund, an actively managed fund, a passive fund, a stock fund, a REIT fund, a bond fund, or a commodities fund. That’s a lot of choices, and that’s not even all of the choices you have. There are also small cap, mid cap, large cap, growth funds value funds, and target date funds. Feeling overwhelmed? Don’t worry that’s an absolutely normal reaction that a lot of people have when they first encounter all of this information.
Open Ended Vs. Close Ended Funds
The majority of mutual funds you are going to be looking at are open-ended, which means that they will continue to offer shares to new investors as long as people want to buy them.
Active Funds Vs. Passive Funds
The majority of mutual funds are actively managed, which means that a team of financial professionals is continuously monitoring the fund and making adjustments into what the fund is being used to invest in. The changes are made in an attempt to maximize the return that the fund provides. On the other hand, passive funds simply hold onto their investments long term counting on the fact that over time the value of the investments will increase. While this type of fund will not usually yield as much of return, those inferior returns are mitigated by lower costs and operating fees.
Target Date Mutual Funds
This is a type of mutual fund that is meant for investing for retirement and making the process as simple as possible. You pick your fund based on the year you want to retire. For example, if you are 25 years old in 2011 and want to retire when you are 65, then you would choose a mutual fund with a target date of 2050. These types of funds are designed to be more aggressive when you are younger, and then as you get older, they lower the risks involved in their investments to help ensure that you don’t lose your retirement fund.
How Do You Invest In A Mutual Fund?
When you decide that you want to invest in a mutual fund the process of doing it isn’t as hard as some people fear it is. There are a few ways to proceed, and I’ll go over several of them here.
Investing through your work.
If you have a 401K at work, then there’s a good chance you are already invested in a few different mutual funds. So if you have a 401K, then the easiest way to get started is to choose a mutual fund with your retirement account at work.
You can also buy and sell mutual funds online through an online stock broker. Using an online stock broker is one of the easiest ways to purchase funds, trade funds, and also to buy stocks, bonds, and other forms of investment. A lot of online stock brokers also offer free online research tools designed to help you to choose wise investments. The downside to online brokerages is that they charge a fee or commission every time you make a trade, which can cut into your profits.
You can also contact a major mutual fund company such as Vanguard, Fidelity, Rowe Price, or one of many others and open up a mutual fund directly with them and cut out the middle man. The great thing about this approach is that you don’t have to pay a commission when you do it, which can save you a lot of money. Most of these types of funds also have automatic investing options that let you invest as little as $50 a month, which is perfect for people just getting started. The downside here is that since you are dealing directly with a company, you will only be able to invest in that company’s funds.
If you are just starting out with investing, I would recommend you make regular monthly contributions to a mutual fund. If you are trying to save for retirement, then a Roth IRA account is probably a better option. If you are seeking to save for a short-term goal, then set up a taxable mutual fund account, so that when you pull the money out, you won’t have to pay an income tax on it. One of the main benefits of an automatic investing system is that you don’t have to pay a commission for every transaction. On top of that investing a small amount on a regular basis instead of a large lump-sum further, limits your risk.
Now that you have a better understanding of mutual funds next week I’ll go into more detail about how you can choose the right fund for your needs. First, we’ll talk about the cost of different mutual funds that even those who have been investing for a long time may overlook. After that, we’ll cover the different factors to take into account when choosing a fund. While you are waiting for the next post feel free to leave a note in the comments section and I’ll do my best to answer you as quickly as possible in a future post.