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.