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 Buy a Mutual Fund? Mutual funds are primarily bought in dollar amounts unlike stocks, which are bought in shares. Mutual funds can be purchased directly from a mutual fund company, a bank, or a brokerage firm. Before you can start investing, you’ll need to have an account with one of these institutions prior to placing an order. A mutual fund will be either a “load” or “no-load” fund, which is financial lingo for either paying a commission or not paying a commission. If you are using an investment professional to assist you, you will likely need to pay a load.
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.
In a mutual fund, the value of your shares goes up and down as the value of the stocks and bonds in the fund rise and fall. For the average investor to have the same exposure to those investment options and potential profits on their own would be extremely costly both in terms of the actual investment dollars and in terms of time. Additionally, investing in a mutual fund is generally a cost-effective way to gain access to professional money management. Were you to try and invest in individual securities and actively manage them the way a mutual fund’s manager does, it could very easily become a full-time job. In order to make wise investment decisions when you buy individual stocks and bonds yourself, at the very least you’d have to have the knowledge to do extensive research on various types of businesses in general (automobile, construction, medical) and on specific companies (GE, IBM, Microsoft).
Mutual funds are organized into categories by asset class (stocks, bonds, and cash) and then further categorized by style, objective or strategy. Knowing how mutual funds are categorized aids in choosing the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds, and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories further describing the investment style of the fund.
Thanks to computers and the Internet, investing in mutual funds has never been easier. That said, there are many important considerations an investor should take into account before adding shares of a mutual fund to their portfolio. Mutual funds come in a multitude of varieties, including those that focus on different asset classes, those that seek to mimic an index (also known as index funds), and those that focus on dividend stocks. The list covers everything from geographic mandates to those that specialize in investing in securities that fall within a certain market capitalization.
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