Mutual funds can be an easy addition to your portfolio that takes some of the work out of your hands as the managers of the funds handle the actual stock purchasing for you. These large investment vehicles (often worth hundreds of millions of dollars) are easy to get started in as many will allow you to buy in for as little as $100- $500. Here is a step-by-step guide on how to get started investing in mutual funds.
Many people go the route of using online brokerages to purchase mutual funds, similar to how they purchase stocks, a good guide for how to find a brokerage fund can be found here. Other avenues to purchase mutual funds are directly from the fund companies (i.e.
Vanguard or Fidelity) or if you have a sizeable portfolio using a financial advisor may be recommended (as they can purchase the units directly on your behalf).
Mutual funds have varying levels of risk as some are willing to take on riskier underlying investments in order to have a chance at higher growth. Understanding the risk of the mutual fund you’re investing in is important before you actually put your money down. Mutual funds that focus on small-cap companies or growth markets are examples of the type of fund that is typically willing to take on higher risk. Doing some research into the mutual funds performance, its exposure to different industries, and what the mix of underlying assets is can be very informative. Occasionally you’ll find mutual funds labeled as balanced but actually having 75% of their investments in a single sector.
As with any form of investing you should try to diversify your mutual fund portfolio and not just hold a single one. Having a portfolio that has several mutual funds focused on different industries, regions, or equity mixes (bonds vs. stocks) will help ensure that a decline in any one of these investment types doesn’t hurt your portfolio too much overall. One way many investors try to diversify is by purchasing index funds. Index funds are mutual funds that purchase bundles of stocks and try to mimic the performance of overall stock indexes like the S&P 500. In this way, your risk exposure is tied to the overall ups and downs of the market, and not to any single industry.
One major difference you’re going to want to consider is the management fees charged by the company overseeing the actual mutual fund as these can vary widely and don’t always appear to reflect increased performance. You’re going to want to look for the lowest management expense percentage available out of the mutual funds that you’ve short-listed. Always keep in mind that whatever the returns you expect from the mutual fund are immediately reduced by this amount. Actively managed funds aim to generate higher returns by more regularly changing their holdings and actively responding to changes in the stock market. This comes at a cost however as the management expenses for these funds are usually far higher. The alternatives are index funds (discussed above) and funds that have more of a buy-and-hold perspective. These funds are less actively managed and as a result, tend to have lower fees attached. Historically the results of actively managed funds have not been proven to exceed those of index or less active funds.