The following is guest post from John. An IT project manager by profession this blog is where he captures all his learning from the finance world.
If you are considering getting started investing in the stock market, mutual funds will most likely play a large role in how you get started investing. Mutual funds are a favorite among many investors because they offer a lot of advantages, especially to individual investors who may not have a lot of money to invest with. Here is how to start investing in mutual funds, as well as why you should consider mutual funds as an investment for you.
Why Mutual Funds are Beneficial
Mutual funds were created to give individual investors a way to diversify their portfolios without having to invest in individual stocks across the board. For example, a good, diversified portfolio probably consists of 20 different stocks across a variety of industries. To make costs worthwhile, and individual would probably need to invest at least $5,000 in each stock, making the total investment $100,000. Most individuals starting out don’t have $100,000, but they do need to diversify their investments to mitigate risk.
As a result, mutual funds were created, which are baskets of stocks in which one share lets the owner hold a little portion of the whole basket of stocks. For example, a common mutual fund is one that invests in all the stocks in the S&P 500. So, if you own one share, you actually own a portion of all 500 stocks in the index. This gives the investor diversification, as well as a way to better use the money they do have.
What to Look For in a Mutual Fund
If you’re thinking about investing in a mutual fund, it is important to know what to look for. The first thing is what type of mutual fund to invest in. There are funds to match just about any investment objective, so carefully consider why you are investing to narrow down the selection of funds. For example, maybe you want to just match a stock index, so you can search for just index funds.
Then, you need to make sure that you look at the historical return of the fund, as well as any management fees. You want to make sure the return on the fund matches the index return as closely as possible. It never will be exact, but it should be very close. If it is far apart, chances are there is something else going on.
For fees, you should look for a fund with low fees, or a low expense ratio. Fees eat into your returns, so make sure that you find the lowest fee fund that matches your investment objectives.
How To Actually Invest in a Mutual Fund
When you’re ready to invest, you can invest in most mutual funds through your regular brokerage, or through the mutual fund company directly. Many brokerages also offer their own line of funds, which traditionally have lower fees and expenses that similar funds elsewhere. Either way, do your research to find the best fund for you.
I love mutual funds. You can invest in specific sectors or an entire index. They are perfect when I don;t have time to research individual stocks.
Good post. Mutual funds can be great if you don’t have the time to do your own research or just want to hand the management over to someone else. I agree though that it is key to be mindful of expenses so they don’t eat too much of your return.
We both invest in mutual funds however we have an advisor that takes care of all the leg work for us as we are not ready to do our own investing. I’m trying to learn little by little about investing so maybe one day I can take the reigns… maybe.. lol. Cheers Mr.CBB
Excellent post. The one area where I would disagree with you is regarding mutual funds offered by the various brokerage firms. It has been my experience that these fund families are often filled with high cost funds with mediocre results. This was in part born out by a recent suit against several these firms here in the U.S. Generally I would suggest to investors that they go the no-load route, a good way to do this is via one of the fund supermarkets such as Fidelity, Schwab, TD, or several others. These firms typically offer a full selection mutual funds and other investment products with low trading costs.
It is essential to go the no-load route when investing in mutual funds. There is no reason you should have to pay to invest in a fund. I’ve never found a fund that was so good, I would be willing to pay just for the opportunity to invest in it.
I have most of my funds with Vanguard, can’t beat the low cost and selection of some of the best performing funds! I would like to see the industry make it easier for teens and young adults to start investing with lower initial investments!