Investing in Mutual Funds: A Step-by-Step Guide

Investing in Mutual funds are a wonderful method for average investors to establish a diversified portfolio without a lot of extra cost or trouble.

Mutual funds pool money from multiple participants to buy a diverse range of stocks, bonds, and other assets. There are thousands of mutual funds available that pursue a wide range of investment strategies. This can make it difficult for new mutual fund investors to grasp the space.

If you want to understand how to invest in mutual funds, start with these seven simple steps.

What financial objectives do you want to achieve by investing in mutual funds? Are your objectives merely a few years or decades away?

Stock-based mutual funds are an excellent alternative for long-term investing, such as retirement or your child’s college education. You have plenty of time to invest and ride out the market’s inevitable ups and downs. While no investment guarantees a return, mutual funds are safer than other options because you are investing in a diverse set of companies or bonds.

If you’re saving for a short-term objective, such as buying a house or a car in the next few years, a money market mutual fund or a government bond fund may be a decent choice. However, inventors who require immediate access to their funds might consider bank account options such as high-yield savings accounts, which are federally insured up to $250,000. Even the most secure mutual funds cannot provide that assurance.

Once you’ve determined your mutual fund investment objectives, you can select funds with the best investment plan for your needs.

• Long-term goals- Long-term mutual fund investing means you have decades to attain your financial goals. With that in mind, your mutual fund allocation should generally be 70 percent to 100 percent in stock-based mutual funds to position yourself for the most investment growth. Look for mutual funds designated “growth funds” to invest in companies that are predicted to grow faster than others. These funds carry a higher level of risk, but they also have a higher potential for substantial gains. The Vanguard Growth Index Fund (VIGAX) and Fidelity Growth Discovery Fund(FDSVX) are two growth mutual funds to examine.
• Mid-term goals- If investing extensively in stocks makes you nervous, or if you have a goal within the next five to ten years, you may want to consider a strategy that lowers the potential for quick fluctuations in investment value. Balanced mutual funds invest in both bonds and equities, which helps to mitigate some of the risk associated with stocks. Vanguard Wellesley Income Fund (VWINX) and American Funds American Balanced Fund (ABALX) are two balanced mutual funds to examine.
• Short-term goals- If you are only a few years away from your goal, your priority should be to reduce risk so that you do not run out of money when you need it. You might invest 30% in stock mutual funds and the remainder in bond funds. The bond funds will provide a consistent income through interest payments, whereas the minimal equity component may provide some investment growth. PIMCO Total Return (PTTAX) and Vanguard Equity Income Fund (VEIPX) are two income-oriented mutual funds to examine.

Consider investing in a target-date fund if you’d rather not deal with the trouble of deciding on a portfolio allocation. Target-date funds provide a full, well-diversified allocation of equities and bond holdings and target a specific year in the future when the investor has to withdraw their cash. The further the fund is from that date, the more it invests in riskier assets such as equities. As the target date approaches, the fund’s holdings are gradually reduced to lower-risk assets such as Treasury bonds.

Use tools like the Mutual Fund Observer and Maxfunds to research possible mutual funds to invest in. These websites provide thorough information on several mutual funds in a variety of categories. Clients can use mutual fund research tools and screeners on most brokerage websites.

Consider the following factors as you narrow down your selection of mutual fund choices:

• Past Performance-While a fund’s past performance is no guarantee of future success, it can provide a good indication of how well the fund is meeting its stated aims. Past performance should be compared to similar mutual funds or benchmark indices.

• Expense Ratios-These are annual fees that compensate the fund’s managers while also covering the expense of purchasing the fund’s investments. The industry average expense ratio is 0.57 %, however, there are several funds that charge significantly less. While most expense ratios are smaller than 1% or 2%, it is important to pay attention to these since they can have a significant impact on the growth of your money over time.

• Load fees-These are the fees levied by the broker that sells you a mutual fund. Mutual funds are frequently classed as “load” or “no-load.” No-load funds do not charge commissions, whereas load funds do. If at all feasible, you should aim to avoid paying load fees. Given the variety of funds available, you should be able to discover comparable investments that do not charge fees.

• Management- Actively managed mutual funds seek to outperform an underlying index. They typically charge greater fees and offer the possibility of higher returns. Passively managed mutual funds, often known as index funds, seek to replicate the performance of an underlying index.

Fees are often lower than those charged by actively managed funds. In the long run, passively managed index funds have beaten actively managed funds.

You already have access to mutual funds if you enroll in an employer-sponsored retirement plan at work, such as a 401(k) or 403(b). Most retirement plans send your contributions to mutual funds rather than individual stocks or bonds, and you can usually choose to invest in target-date funds if you want to automate your portfolio management.

If you do not have access to an employer-sponsored retirement account or are investing for a purpose other than retirement, you can invest in mutual funds by opening your own brokerage account and investing in the following plans:

• Individual retirement accounts (IRAs)- You can save for retirement by investing in mutual funds through tax-advantaged investment accounts such as regular IRAs or Roth IRAs.

• Brokerage accounts that are taxable– Taxable accounts with an online broker do not provide the tax advantages of 401(k) plans or IRAs, but you can withdraw funds at any time without penalty. This makes them particularly well suited to achieving goals before reaching the federal retirement age of 59½ months.
• Savings accounts for education– You can start a 529 college savings account and invest in mutual funds if you have children and want to prepare for their future tuition.

Make sure you have adequate money in your investment account before you begin investing in mutual funds. Keep in mind that mutual funds may have greater minimum investment requirements than other asset classes. Vanguard, for example, has a minimum commitment of $3,000 for actively managed mutual funds. Other investments, such as individual stocks or ETFs, do not often have such minimums.

ETFs and equities can also be purchased at any moment during the trading day. Mutual funds, on the other hand, trade only once every day, after the market closes. This distinction may be unimportant for people who are investing for the long term and are not looking to make a fast buck from market volatility.

While it may appear that mutual funds lag behind stocks and ETFs, they do have one significant advantage over those other investments: it is often easier to purchase fractional shares of mutual funds. This implies you can invest any dollar amount rather than being confined to intervals equal to whole share prices. This allows you to invest and grow more of your money in the market sooner.

While it has historically been impossible to undertake fractional investing with ETFs or stocks, an increasing number of brokerages and micro-investment platforms are allowing clients to purchase half shares of ETFs and certain stocks.

For most people, investing isn’t a one-time event, and if you want to build wealth or meet financial goals, you’ll need to develop a strategy for continuing to invest. Your brokerage trading platform can assist you in setting up recurring investments on a daily, weekly, or monthly basis, so you don’t have to remember to deposit money into your account each time you wish to invest.

This not only helps you increase your money, but it may also help you spend less per share due to an investment theory known as dollar-cost averaging. By investing a specific dollar amount on a regular basis, you limit the danger of purchasing a large number of mutual fund shares when prices are extraordinarily high. On the other hand, because you are investing a fixed amount of money, your money buys more shares when prices are low. This may reduce the average price you pay per share over time.

You should also make a schedule to check up on your investments at least once a year. This will allow you to rebalance your portfolio and ensure that its asset classes still reflect the level of risk you are willing to accept in order to reach your objectives. Portfolio rebalancing is vital, so if the notion of doing so sounds onerous, you may check into robo-advisors, which are automated platforms that typically include this service as part of their management services.

You’ll eventually want to sell your mutual fund shares to support your financial goals, such as retirement withdrawals.

If you purchased mutual funds with backend loading, you will be charged a fee by your broker when you cash out. Unless you hold your investments in a Roth IRA or Roth 401(k), you will almost certainly owe taxes on any capital gains. Consider consulting with a financial advisor or a tax specialist to devise ways for reducing the taxes you may owe on your investments.