Getting Started. Investing begins before buying the first mutual fund (or prior to buying the next one). If you’re investing independent of a financial advisor, ask yourself a few questions: What do you hope to accomplish with your savings? A secure retirement? Accumulation of wealth for strengthening your financial security? What is your time horizon? One year? Five years? 10 years?
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).
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A beginning investor may buy their first mutual fund to start saving for retirement, while a large investment firm might use the same mutual fund in a portfolio of funds for a major client, such as a wealthy trust client or an endowment fund used by a major university or non-profit organization. There’s no doubt that mutual funds are here to stay for many more years and decades to come. With trillions of dollars invested in mutual funds in the U.S. alone, and popularity increasing in emerging markets like India, there’s no reason to expect this versatile investment type will do anything but gain in popularity in the future.
When you can keep expenses low, and buy quality funds at the same time, your long-term returns are likely to be superior.
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.