How to Invest in Mutual Funds
Mutual fund investing offers most of the advantages of financial diversity, plus the investment management flexibility that comes with stock market investments. Mutual funds don’t carry as much risk as stock market investment, in most cases.
Just like with any other investment opportunity, investing in mutual funds requires you to face some risk. Don’t forget also that fees and taxes will diminish the immediate value of your mutual fund’ investment. Any investment can go bust; anyone telling you different is trying to sell you an investment.
With that in mind, lets look at how to invest in mutual funds. Before we delve in, let’s get an understanding of what mutual fund investing is and how you can choose a mutual fund products that’s best for you — that is, one that matches your needs in terms of risk and potential gain.
The following is a collection of six basic mutual fund tips and mutual fund advice to help you get started and answer some common questions.
1. What is a mutual fund anyway?
A mutual fund gathers money from a wide pool of investors to put together its own portfolio of stocks, bonds, or other securities. These decisions are made based on that fund’s charter.
Each investor in the mutual fund then either earns or owes a piece of the financial gain or loss mutually. Hence the name “mutual” fund.
2. How is a mutual fund easy to diversify?
Because almost all mutual funds require small investments (anywhere from just a few hundred to a few thousand dollars at a minimum), mutual fund investors can build a highly diverse personal portfolio, with much less money than it would take to diversify one stock at a time.
3. What are some different types of mutual funds?
There are so many types of mutual funds that just categorizing them can give you a headache. Here are a few examples: sector funds, growth funds and index funds.
Sector funds buy shares of companies in a specific sector of the economy, like technology or health care. Growth funds are mutual funds that buy shares of up and coming companies expecting heavy growth. Index funds are mutual funds that buy shares of every stock in a single index, like the S&P 500.
4. Mutual Fund’s Weird Cousin: Bonds
There are also such things as bond funds for a variety of investment needs. You can make a safe investments in a government bond fund or, if you want to risk some money in the bonds market, invest in so called high-yield bond funds.
5. What is “risk” in a mutual fund?
Every mutual fund has a different level of “risk”, a chance that you’ll lose money on your investment in a given year. If you are a customer who can deal with a big market swing or two for a shot at bigger returns in the long term, go after so called “high risk” mutual funds. Understand that downtrends occur in the economy which can affect even sound investments, such as the sell-off of September 2008.
Still, some mutual funds are stronger than others, while others offer bigger rewards.
Here’s how to tell how risky a fund it. Take a look at that particular fund’s biggest single quarterly loss. This will tell you how bad it can get. There’s also a state known as the standard deviation: this number will tell you how much a mutual fund or bond fun moves up and down from its average return.
6. Don’t dump and run.
Every mutual fund has the capacity to have an off year or two. Mutual fund investing is long term investing. If you want quick gains inside a year, go play the stock market. Remember that if your mutual fund goes down a bit over a year this is the best time to buy more shares in that fund and cut your losses when the fund moves back up.
Only when you feel like your earnings are consistently below the expected performance, should you dump the fund. Moving on too quickly after a small loss will never earn you money, but re-investing and preparing for a good year will make you money every time. Learning how to invest in mutual funds is about making strong investments and keeping faith in the original investment.