Investing in Mutual Funds 101: A Complete Beginner’s Guide


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  • You can start investing in mutual funds by planning your goals and choosing between an active or passive investment strategy.
  • Mutual funds are generally actively managed, but there are passive mutual funds like index funds.
  • When investing in mutual funds, consider sales charges and expense ratios, which can add up.
  • Visit Insider’s Investment Reference Library for more stories.

Investing your money can help turn a dollar into more, giving you the ability to build wealth without having to work harder. Thanks to

compound interest
and a variety of investment vehicles, you can decide where to put your money.

One type of investment vehicle that can help diversify your money is a mutual fund, which gets money from investors and pools it into a fund. These funds invest in various securities such as stocks, bonds and short-term debt. Mutual funds are often actively managed, but not always.

Here’s how to start investing in mutual funds.

Step 1: Examine Your Finances and Goals

Before you start investing in mutual funds, it’s important to first look at your current income, expenses, monthly debt, and net worth to see where you stand financially.

You wouldn’t build a house without laying a good foundation – and the same goes for your finances. Having an emergency fund and manageable debt is important if you want to invest. Why? Because investing is risky no matter how you look at it. There are ways to minimize your risk by determining your risk tolerance, but it is essential that you have that financial foundation and that safety net.

Knowing where your finances are now can determine how much you can afford to invest and what your asset allocation should be based on your risk tolerance.

In addition to that, also consider your short and long term goals when investing. Will it be used for a down payment in five years? Or for your retirement in 30 years? Knowing your goals and having a rough timeline can ensure you stay on track and know why you are investing in the first place.

Step 2: Research the types of mutual funds

According to the Securities and Exchange Commission (SEC), a mutual fund is an open-ended investment company registered with the SEC that collects money from various investors to place it in asset classes such as than stocks, bonds, etc.

When you invest in mutual funds, you end up buying shares of the mutual fund that reflect partial ownership of the total portfolio.

“Mutual funds are baskets of various stocks with a common theme, such as“ US Equities Growth Fund â€or“ Sustainable Developed Markets Fund â€. They generally have a net asset value, which is determined once a day, unlike stock prices which fluctuate during the day in the markets, â€explains Gary Grewal, chartered financial planner and author of“Financial Fives: The 325 Best Ways To Save, Earn, And Thrive To Retire Before 65. ”

There are many types of mutual funds you can invest in:

  • Equity funds: These invest in the shares of a company. There are certain nuances within equity funds, including those that focus on investing in a company’s stocks, growth-oriented stocks based on financial returns, income-oriented stocks that produce returns. dividends, equity funds based on certain sectors, as well as index funds that track specific indices and seek to produce similar results.
  • Bond funds: This is a type of investment company that focuses on investing in bonds and debt securities. The risk associated with bonds may differ depending on the bond. As an investor, the SEC recommends whether you take into account the credit risk if the bond issuer does not repay the debt, how changes in interest rates will affect the value of a bond fund, as well as the risk of prepayment and what happens will pass if the bond issuer redeems the bond earlier than expected.
  • Money market funds: These are the least risky and only invest in specific investments issued by the US government or companies.
  • Target date funds: These contain a combination of stocks and bonds that are meant to help you retire on a certain date, called target date funds. They can also be called life cycle funds. The asset allocation will change over time depending on the overall goal.

In many cases, mutual funds are actively managed by an investment professional. But it is also possible to invest passively in mutual funds, generally referred to as mutual funds.

index fund
. Also: mutual funds can be index funds – and vice versa.

Actively managed mutual funds work with a professional manager whose main goal is to help you beat the market. They do most of the work when it comes to choosing securities to invest in and evaluating performance.

Passively managed funds like index funds aim to match the results of a particular index and do not have a professional manager. As such, it is a passive way of investing as there is no outside help. No outside help usually means lower costs.

In order to diversify your investments, you will want to invest in different types of mutual funds, not just one type in a specific industry.

Step 3: Choose a passive or active strategy

After researching the different types of mutual funds, you want to be clear about whether you want to have a passive or an active strategy.

Actively managed mutual funds are more expensive because they incur fees, may reduce some of your investments, and may also lead to tax events.

For example, there may be mutual fund distributions that you have to report and pay taxes. When you invest in mutual funds, you can earn capital gains distributions as well as dividend payments. This can be a good thing, but there can also be tax implications.

Depending on what your mutual fund manager is doing, this could result in higher taxes because of the difference in holdings.

When you sell an asset, you have to pay capital gains taxes if you hold the asset for more than a year and there is an increase in value. If you hold less than that, you will be taxed at the regular income rate, which is higher (which can go up to 37% versus 20%).

Passively managed mutual funds, such as index funds, seek to replicate the market returns of a particular index, such as the very popular S&P 500. They are more affordable for investors because the fees are lower because none. entity does not manage the investment. , because you manage it yourself.

“Active funds usually have higher expense ratios and may even come with sales charges. Assets means that there are human portfolio managers whose job it is to manage the investments within the mutual fund to try and beat the market, â€says Grewal.

In many cases, actively managed funds do not really outperform passively managed funds long-term.

“Numerous studies have shown that over time it is very difficult to beat the market, so passive funds such as those that track the S&P 500 Index may be a better choice for those who are concerned about fees, because passive funds have expense ratios that are generally much lower than their active counterparts, â€explains Grewal.

To assess the impact and costs, you can use the Fund analysis tool by the Financial Sector Regulatory Authority, or FINRA. You can also consult the prospectus of the mutual fund for a breakdown of fees, risks and overall performance. For active and passive mutual funds, you should also consider the expense ratio, which includes the costs of running your account.

Step 4: Invest in mutual funds

After you have researched types of mutual funds and chosen a strategy, you want to start investing in mutual funds.

“One can easily invest in mutual funds through one’s workplace pension plan, IRA, or by opening a brokerage account through Fidelity, Schwab and Vanguard,†notes Grewal.

When you invest in mutual funds, you are buying shares of a brokerage house or the fund itself. The amount you end up paying will vary depending on the sales charge or the sales charge and the net asset value per share of the fund. You might also be able to invest in mutual funds that don’t have an associated sales charge.

To get started, choose a brokerage house or company to invest in mutual funds. You can check out some popular options like Fidelity, Vanguard, Charles Schwab, and Etrade. Before opening an account, be sure to read the prospectus and all the fine print and also consider:

  • Any minimum account required
  • Ease of use of website and mobile app options
  • Available funds
  • Total costs such as sales charge and expense ratio

After opening an account with a brokerage, deposit money into the account, then select the mutual fund you want to buy and buy stocks. Create a plan to add funds regularly, such as monthly, and review your performance as you go to see if any changes need to be made.

The financial report

If you want to start investing in mutual funds, the main things to know are active strategies versus passive strategies and the costs that can accompany each choice. Your choice will determine how much you pay and also whether you take a practical approach or not.

Investing in mutual funds can be an easy way to diversify your portfolio and also offer a straightforward redemption process if you want to redeem your stocks.

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