Perhaps the greatest benefits of buying mutual funds are that they are simple enough for beginning investors to buy and manage but they are also powerful and productive enough for even the most seasoned of investors. This guide will walk you through the purchase of your first fund to building a complete portfolio of mutual funds. Choosing the Place to Buy Mutual Funds. Although you can buy mutual funds through a discount broker, such as Charles Schwab or Scottrade, the best way to buy mutual funds is through a mutual fund company. But you don’t want to start with just any mutual fund company; you’ll want to do a bit of research to find a reputable firm that has a broad selection of low-cost, high-quality mutual funds.
Mutual Funds Offer Automatic Reinvestment. An investor can easily and automatically have capital gains and dividends reinvested into their mutual fund without a sales load or extra fees. Unless you are looking for income (i.e. dividends separated and deposited into cash for income reasons), you’ll want to choose the option to reinvest dividends and capital gains. This will take advantage of compounding interest, which essentially means that the interest, dividends, and gains will go to buy more shares of your mutual funds, rather than the cash coming out and being deposited into a separate account.
Building Your Portfolio. Building a mutual fund portfolio is similar to building a house: Many different strategies, designs, tools and building materials exist, and may be applied; but each structure shares some basic features. To build the best mutual funds portfolio, go beyond the sage advice, ”Don’t put all your eggs in one basket.” A structure designed to withstand the test of time requires smart design, a strong foundation and a simple combination of mutual funds that works well for your needs.
Frugality: Mutual Funds Cost Less to Manage Than Other Portfolio Types, Costs as a percentage of assets in the portfolio are usually lower for an actively-managed mutual fund when compared to an actively-managed portfolio of individual securities. When you add up transaction costs, annual fees paid to a brokerage firm, and the cost for research tools or investment advice, mutual funds are less expensive than the typical portfolio of stocks. Other variables influence the cost of managing a portfolio, such as the amount of trading activity, the size of transaction, and taxes.
How Do I Select a Mutual Fund? This is where you’ll want to laser focus your attention and become an amateur sleuth while doing your research. The number of mutual funds available to investors right now rivals the number of stocks on the North American exchanges. Each one of these funds is unique but can be categorized based on the type of underlying securities held within it. At the broadest level, a fund falls into one of three categories: equity (which is stocks), fixed income (which are bonds), and money markets (similar to cash).