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).
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.
Variety: Mutual Funds Come In Many Different Categories and Types. As you grow your portfolio of mutual funds, you will want to diversify into various mutual fund categories and types. You can invest in mutual funds that cover the main asset classes (stocks, bonds, cash) and various sub-categories or you can even venture into specialized areas, such as sector funds or precious metals funds. Affordability: Mutual Funds Have Low Minimums, Most mutual funds have minimum initial investment requirements of $3,000 or less. In many cases, if the investor initiates a systematic investment program, where they have a fixed dollar amount or fixed number of shares purchased once per month, the initial investment can be as low as $1,000.
Opening an Account to Buy Mutual Funds. If you don’t already have an investment account at a brokerage firm or mutual fund company, you’ll need to open one before you’re ready to make your first purchase. Opening an account doesn’t require money; all you need to do is choose the company where you’ll invest and follow their procedures.
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.