Target Date Mutual Funds: These funds invest in a mix of stocks, bonds, and cash that is appropriate for a person investing until a certain year, which is usually retirement. As the target year approaches, the fund manager will gradually decrease market risk by shifting fund assets out of stocks and into bonds and cash, which is what an individual investor would do themselves manually. Therefore, target-date mutual funds are a type of ”set it and forget it” investment that doesn’t require ongoing management. For example, if you are saving for retirement and think you may retire around the year 2035, a good choice for you might be Vanguard Target Retirement 2035 (VTTHX). Once you choose your first mutual fund, you’ll have the foundation started. You can then build upon that foundation by purchasing more shares of this fund and eventually add more funds for greater diversity.
Simplicity: Mutual Funds Are Easy to Understand, Anything can be made into something more complex than it needs to be and mutual funds are no exception to this truth. However, mutual funds require no experience or knowledge of economics, financial statements, or financial markets to be a successful investor. For beginners, here is a simple definition of mutual fund: A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings combine to form one mutual fund, also called a portfolio.
Investing in Mutual Funds Is Easy. Putting together a portfolio of stocks and bonds can be difficult, if not impossible, for the average investor. For example, the time and knowledge required to research and analyze a dozen or more stocks can be too challenging for most people. That’s not to mention all the trades needed to build the portfolio, plus the ongoing research and analysis required to maintain the portfolio. But when it comes to investing in mutual funds, investors can get started investing with just one mutual fund.
Each investor is charged a percentage of his or her investment to help cover all the costs of running the mutual fund, including having a professional fund manager as well as researching, buying, and selling stocks. But again, investors can benefit from their collective investments. Mutual fund fees are spread out over all of the investors, so the costs to each individual investor is still much less than it would have been if he or she had purchased the stocks directly and paid a broker or financial advisor to manage the investments. Though many mutual fund options are indeed cost-effective, there are many types of mutual fund fees, from front-load fees to constant-load fees, so it is always best to be aware of the type of fee and how it is calculated before investing in a mutual fund.
Avoiding the Dave Ramsey Mistake
Saving for Your Initial Mutual Fund Purchase. Most mutual funds have what’s called a minimum initial purchase, which is the amount you’ll need to have saved prior to buying shares of your first fund. Most mutual fund companies have minimum initial purchase amounts of at least $1,000. For example, most of Vanguard’s mutual funds have a minimum initial purchase requirement of $3,000. Fidelity funds are typically at $2,500. However, once you make your first purchase, subsequent purchases of the same fund are usually as low as $100.