As with all financial investments, the risk level is an important consideration when evaluating mutual funds. As an investor, you should make every effort to understand how much risk you are willing to take and then seek a fund that falls within your risk tolerance. Naturally, you are investing with some objective in mind, so narrow down your list of candidates by concentrating on funds that meet your investment needs while staying within your risk parameters. In addition, check to see what the minimum amount is to invest in a fund. Funds have different minimum thresholds depending on whether it is a retirement account or nonretirement account.
Professional Management: Mutual Funds Have a Team of Professionals Researching and Analyzing Investments So You Don’t Have To! Perhaps the greatest benefit of all is that investors can save countless hours of time, energy and frustration involved with the research and analysis required to find quality investments to hold in a portfolio. That’s not to speak of the skill, desire and patience required to do a job well in any professional pursuit. Mutual funds enable investors to do more of the things in life they enjoy rather than spending time and energy on investment matters.
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S&P 500 Index Funds: Index funds can be a great place to begin building a portfolio of mutual funds because most of them have extremely low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund. As their name suggests, index funds simply hold the same securities that are found in an index. S&P 500 Index funds invest in approximately 500 of the largest U.S. companies. Index funds are passively managed, which means their primary objective is to mirror the holdings and performance of an index and therefore costs to operate these funds are extremely low. Therefore, you can meet the initial goal of getting a low-cost, diversified mutual fund when you buy index funds. For more on index funds, check out our Index Investing FAQ page. Again, mutual fund companies like Vanguard, Fidelity and T. Rowe Price are good places to find the best index funds. You can also look at Charles Schwab.
This is work that most of us are not interested in, do not have the time for, and, most importantly, are probably not as qualified to do. By purchasing shares of a mutual fund, you’re also purchasing the money management and investment skills of the fund manager whose job it is to invest and reinvest the mutual fund’s capital based on the fund’s established goals.
If you’re a bit more experienced in investing or are fortunate enough to have a bit of money to ”play around with” for a while, a somewhat more aggressive approach might be right down your alley. Determining Asset Allocation. Once level of risk tolerance is determined, consider your desired asset allocation—the mix of investment assets (stocks, bonds, and cash) comprising your portfolio. The proper asset allocation will reflect your level of risk tolerance: aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).