Choose Wisely When choosing mutual funds for your portfolio, do your homework. Review each fund’s fees and individual asset allocation to make sure you’re choosing a fund that fits your investment goals and risk tolerance. Also, consider a fund’s performance. While past history doesn’t guarantee future results, it’s also wide to look at how much a fund has gained or lost in the past.
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.
Knowing Your Risk Tolerance. Before choosing funds, it’s important to know your risk tolerance—a measure of the level of fluctuation (a.k.a. volatility—ups and downs) or market risk to which you’re willing to subject your portfolio. If you are just getting started investing with mutual funds, or if you get highly anxious when your $10,000 account value falls by 10 percent (to $9,000) in a one-year period, your risk tolerance is relatively low—high-risk investments probably aren’t for you. You might consider starting with a balanced or ”hybrid” fund.
Mutual Funds Lack Liquidity. How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closed-end funds require you to wait three days after you sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress.
The mutual fund then passes along the profits (and losses) of those investments to its shareholders. So if a mutual fund does well, you benefit. But, they’re not risk-free. Read on to learn more about how mutual funds work.