How To Invest In A Mutual Fund For Beginners
Your first mutual fund investment is a big step, so it’s important to educate yourself. Learn 5 expert tips how to invest in a mutual fund for beginners today!
In 2016 there were 9,511 mutual funds in the U.S. and 79,669 globally.
How do you make investment decisions given the range of options?
Mutual funds are a popular way for an investor to grow wealth either through retirement plans or through a brokerage account. You need to have some understanding if you are not to get your fingers burnt.
Read this guide for 5 expert tips on how to invest in a mutual fund for beginners.
What are Mutual Funds?
Before we run through the 5 expert tips on how to invest in a mutual fund for beginners, you need to understand what mutual funds are.
A mutual fund places the assets of a number of investors into a pool and then invests these pooled funds on the investor’s behalf.
Companies that do this manage these assets for the investors. The investors can be individuals or organizations.
Funds typically have a Fund Manager who invests and manages the cash. The Fund Manager does this in line with a goal. This goal varies depending on the fund and can be very diverse.
You may be looking to:
- Achieve a fixed income
- Beat the S&P 500 index
- Achieve a fixed return investing only in “ethical businesses”
Mutual Funds charge fees for the service they offer and part of what they are selling is the expertise of the Fund Manager. Anticipating movements in financial markets is difficult. A mutual fund with a Fund Manager who can claim a track record of success will attract investments.
How to Invest in a Mutual Fund for Beginners?
Why invest in Mutual funds? The rationale for mutual funds is that they are a means of investors having a diversified investment without making lots of separate purchases.
You may need $100,000 to make investments across the range of shares and bonds that a mutual fund makes. For say, $1,000 you can invest in the fund and have a stake in all those shares and stocks.
Diversification is important because it goes some way to reducing the risk of losses. Investing in different kinds of assets, each of which react differently to events, means you have some protection against market volatility.
Additionally, you have to be aware that there are two kinds of mutual funds.
Take a look at the following image:
Now let’s focus on tips for how to invest in a mutual fund for beginners.
1. Check the Sales Load
Some mutual funds make a charge that is then passed on to the person who sold you the fund. This is how wealth managers and advisor make their money. Check out whether this is the case with your investment.
You should minimize this charge and if possible buy no-load funds. This way the whole of your investment is actually used to buy shares and stocks. That way it’s all working for you.
2. Check the Expenses
The mutual fund has operating costs. Like any business, they have to cover payroll, power, office leases and other expenses.
Given that, you don’t want to be paying for excessive expenses. If two funds have expense ratios of 0.6% and 1.6% you have to pay the more expensive fund an extra 1% of your earnings before you see any return.
A lower return from a low-cost fund could turn out to be the better deal.
3. Minimize Tax
It might be possible to challenge Benjamin Franklin’s certainty about death and taxes.
Well, the taxes anyway.
If you are investing through tax-free means such as 401K or IRA then you won’t need this tip. Everbody else needs to pay attention to the turnover ratio of the fund.
A high turnover ratio means that a high proportion of the portfolio is being sold and bought in any one year. Be concerned if over 50% of the portfolio is turning over each year. There are taxes paid on all those trades and guess who pays.
4. Diversify to Reduce Risk
You are reading this guide on how to invest in a mutual fund for beginners because you are a beginner. If you were an expert you might be able to spot the opportunities with laser accuracy, but you can’t.
Diversification is your defense against risk.
Don’t invest in funds with a heavy sector emphasis. Just because you worked all your life in automotive doesn’t mean automotive is where you should invest your hard earned cash.
Spread your investments across different mutual funds to reduce risks of exposure one fund manager or company.
Don’t limit investments to stocks and shares. Other areas to consider are real-estate, cash, international and other funds.
Think about achieving a balance of investments that reflect your tolerance for risk and your investment aims.
5. Index Funds Might Be the Answer
Actively managed funds trying to outperform the markets might seem attractive. Few of them do this over the long term.
You may be more likely to achieve your investment aims by starting early and investing for longer in an index-linked fund.
Index-linked funds follow the market, by constructing a portfolio to track a market index such as Standard and Poors 500 index.
Have Your Cake and Eat It, Too
There is a way in which these 5 expert tips on how to invest in a mutual fund for beginners come together into a single approach. You can have it all.
These tips have focused on reducing the cost of sales loading, expenses, and tax. Add to this, reducing risk through diversification and you have the start of a plan. Indexed linked investments might provide an acceptable long-term return for you too.
Combine low expenses and low turnover ratio with wide diversification and you are pretty much describing the typical index-linked fund. Look for low or better still no sales loading and you are making a sensible start as an investor in mutual funds.
Remember, investments can go down as well as up.
This has been about how to invest in a mutual fund for beginners.
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