A mutual fund is an investment made up of a portfolio of stocks, bonds, or other investments. When you purchase a mutual fund, you are purchasing a small share of this collection of multiple investments. There are many advantages to investing in a mutual fund as opposed to investing in individual stocks. If you’re considering investing in a mutual fund, the process is quite simple, but there are a few things you should do before investing. Here’s exactly how to invest in mutual funds.
Speak with a financial advisor at Modern Family Asset Management for assistance on creating a financial plan that works for your specific needs. Contact Us.
Benefits of Investing in a Mutual Fund
One of the biggest advantages of mutual funds is that they minimize risk by increasing diversification. Mutual funds typically have more than 100 different investments in their portfolio. That means with a single purchase, you can have 100 different investments in your portfolio.
While the minimum amount required to invest in a mutual fund depends on the mutual fund, it still costs only a small fraction of what it would cost to invest in each of these investments individually. An additional advantage of a mutual fund is that you get the services of the fund’s portfolio manager. This can be a huge advantage if you don’t have the time or experience to manage a portfolio yourself.
Choose Between Active and Passive
When looking for a mutual fund to invest in, one of the first things you’ll need to do is choose between an actively and passively managed fund. Actively managed portfolios try to beat the market, while passively managed portfolios try to mimic the success of the market. While actively managed may sound more appealing, the catch is that few, if any, managers consistently beat the market. Short-term success is possible, but over time, actively managed portfolios almost always end up with the same performance as passively managed portfolios, if not worse.
Another factor to keep in mind when comparing actively and passively managed funds is that active funds are typically more expensive, while passive investing is usually cheaper and has fewer fees. If you choose to go the passive route, a popular form of passive investment is an index fund, which aims to mirror the performance of an index—for example, the S&P 500.
Decide Where to Buy Your Fund
You have a few options to choose from when deciding where to purchase your mutual fund. If you have an employer-sponsored plan such as a 401(k) or 403(b), you’re probably already invested in mutual funds, since mutual funds are a major component of these accounts.
You can also choose to purchase a mutual fund directly from the company that creates it, such as Vanguard. The problem with this is that the mutual fund options are often limited.
Another route is to purchase a mutual fund from many different online brokers, who typically have more options. When you compare your buying choices, you’ll want to take into account costs, the variety of available funds, how difficult or easy the interface is to interact with, and the tools and educational materials that the company provides.
Historical performance is no guarantee of future results. That said, you’ll likely want to look at some type of metric to compare how certain funds have previously performed. If you choose to look at the past performance of a specific mutual fund, it’s far more beneficial to look at three-year or five-year returns as opposed to short-term performance. You’ll also want to consider returns in context. A great way to do this is to compare the mutual fund’s returns to a benchmark. You’ll also want to consider how the fees associated with a fund affect the performance.
Fees can have a major impact on your performance, so it’s important to take them into account when comparing different mutual funds. These are the fees you should be aware of when investing in mutual funds:
- Loads. Mutual funds aren’t allowed to charge commissions, so they have loads, which are similar to commissions.
- Transaction Fees. Buying or selling may come with transaction fees.
- Redemption Fees. These fees may be charged if you haven’t held the shares for very long.
- Other Fees. Mutual funds also generally have ongoing operating expenses, which include investment advisory fees and transaction fees.
You’ll want to learn about all the fees associated with a mutual fund before purchasing any shares. More fees mean less money invested, which means less money that can earn returns. Compound this over years or even decades, and even small differences can have a huge impact.
Talk to an Experienced Financial Advisor
We hope you have a better understanding of how to invest in mutual funds. Keep in mind that as with any other investment, you’ll want to discuss your options with your financial advisor to see how a mutual fund fits into your financial plan. You’ll also want to include any mutual funds you purchase in a review of your investments at least once a year. Contact the team at Modern Family Asset Management today for assistance.
Investing in mutual funds involves risk, including possible loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.