Guide to Investing in Mutual Funds

Interested in investing but don't have that much money to invest on your own? A mutual fund may be the answer. Mutual funds are investments that combine your money with that of other investors to purchase stocks and other securities (portfolio).

This money is overseen by a professional financial manager or portfolio manager, who is in charge of buying and selling securities to grow the fund. Learn more about how mutual funds work and how to choose the right one for you below.

Mutual Funds Basics 

As we mentioned before, mutual funds combine investments from different sources and with that money, a manager buys securities to increase the fund's value. However, investors buy shares of a mutual fund, they don't buy the securities themselves. 

The manager is the one who buys and sells assets that meet the fund's purpose. This purpose depends on the interests of the investors. The purpose may be, for example, to earn the highest yield at the lowest risk. 

Because mutual funds are professionally and manually overseen, shareholders must pay annual fees to the individuals or companies managing the portfolio. Moreover, depending on the fund, you may have to pay for other expenses, including:
  • transaction charges
  • redemption fees
  • operating costs

Benefits of Investing in a Mutual Fund

Mutual funds are currently the most popular investment choice in the country, and this has to with the benefits they offer. Some of these benefits include:
  • Getting expert guidance from an experienced portfolio manager for a low cost.
  • Increasing your shares and consequently, your earnings. As the fund grows and gains profit, those dividends can be used to increase your shares in the fund and earn more money.
  • Investing in a low-risk endeavor. Mutual funds invest in several different securities to make sure the risk is low and earnings are high.
  • Investing is cheap. You can invest as little as $2,500.

How to Invest in Mutual Funds

The best way to become a mutual fund shareholder is to first contact a fund you are interested in or a broker that can help find suitable funds. 

If you would rather not select the fund and prefer to have your investment managed by someone else, you can always get a brokerage account. Brokerage accounts are essentially an arrangement you make with a brokerage firm, who is will finding profitable businesses to invest your money in. However, the final decision is always yours.

How to Choose a Winning Mutual Fund

Currently, there are more than 10,000 mutual funds in the country, so if you want to find a mutual fund by yourself, you will need to do extensive research. To help speed the process along and select a successful mutual fund, consider the following tips:

1. Think of the purpose

To limit the scope of your research, think about what you want out of your investment, and that can help define the purpose you want the mutual fund to have. Do you want income or long term capital gains? Do you want that money for your retirement or a college fund for your kids? These types of questions can help narrow your choices.

2. Consider the level of risk

Do you prefer a more conservative yet less profitable mutual fund, or are you willing to risk a bit more for the chance of making larger profit margins?

3. Take the length of the investment into account

Will you need to be liquid in the near future or can you afford to have you money invested for years to come? Once you have considered the previous questions, make sure you read the prospectus documents of the mutual fund you are more interested in. This document outlines the fund’s:
  • risks
  • purpose
  • fees
  • performance
  • strategies

4. Consider the expenses carefully

If expenses are too high, the investment may disappear in just your first few months as an investor and you may even end up owing the fund.

5. Avoid High Turnover Rate Funds

Turnover rates are the percentage of the fund that is sold and bought every year. The higher the rate, the more taxes the fund will have to pay

6. Opt for Diversity

Mutual funds that invest in different assets are generally safer and can even get higher profits. Having investments in different industries reduces the risk of losing large amounts of money, as opposed to investing the majority of the funds in just two or three different types of securities.

Then, all you must do is fund the account. Depending on which mutual fund or funds you choose, your initial contribution can be as low as $100 or as high as $100,000.

Best Mutual Funds to Invest In

Numerous financial information websites such as Kiplinger, NerdWallet and Vanguard post lists of the top mutual funds for each month. These are helpful resources for you to begin researching and exploring options.

Many seasoned investors have purchased shares of gold mutual funds. Precious metals have consistently held steady in the stock market. As a result, many investors have an interest in the commodity.

However, when you purchase a gold mutual fund, you are not purchasing physical gold. Instead, you are purchasing stock in a mining company or companies.