Guide to Buying Mutual Funds
Mutual fund investing is a very popular and low risk kind of investment that a lot of investors use to diversify their portfolio. Mutual funds, in a sense, are a group of stocks, bonds, or other investments, in which several people, companies, or other investors pool their money together to buy. Usually, a manager is hired to manage buying mutual funds and handles the money and what income it produces, then distributes the earned money accordingly.
There are several different things to consider before deciding on mutual funds, but first let’s look at some pros and cons associated with mutual funds.
Some pros of mutual funds include:
- Mutual funds can be fairly low risk, depending on which ones are purchased
- Less research and scrutiny are required for mutual funds, especially if a manager is hired. It is their job to decide the best course of action
- When buying mutual funds, you have the chance to pay in a lump sum, or pay in over time, also known as dollar cost averaging
- This type of investment is a great way to diversify portfolios, or spread out your money. This is helpful if one or more of your investments go downhill, you will still have other ways to keep your head over water
- Depending on what kind of risk taker you are, there are different levels of investments that could potentially yield more profit
- Mutual funds are sometimes a good option for those who are unable to invest as much money, as there are lower cost options.
Now let’s consider some cons or risks with mutual fund investing:
- Mutual funds are NOT insured by FDIC, so your money isn’t secure in case of company bankruptcy
- Less control. If you are looking to have input on all aspects of your investments, mutual funds are not the right choice for you. Since you are not the sole owner, you cannot make sole decisions
- Similarly, there is always the chance of hiring a less than honest manager. If he or she does not have you and your co-owner’s best interests at heart, money can be lost
- Investing in a riskier fund can potentially cause money loss, as with any investment
- There can be hidden and unwanted fees that can take away from your earned money.
How do you go about investing and buying mutual funds? If you already have brokerage accounts, it can be as simple as contacting your broker or brokerage company and tell them how much you want to invest and into what funds. By doing it this way, however, you will most likely pay a commission fee to your broker. There is also the option to buy directly from a mutual fund company. This requires a little paperwork to be filed, usually online. It can be helpful to open a special bank account for these. Finally, and depending on where you work, there may be the option to invest through your employer’s 401(k).
There are a few things to look out for when buying into mutual funds. Aside from commission fees, should you use a broker, there are other fees that may occur during your purchase. Front loaded fees are taken out of your initial payment, so less money goes into the actual account, and causes a smaller amount of money to work with. Back end loaded fees are taken out when you sell the investment. This gives you more initial funds to make money off of, but still takes some from you. If possible, it’s best to find an unloaded investment, so you can make your full potential.
Buying Mutual Funds
To make the most money off your investments, there are a few things to examine. First things first, look for a good team. An experienced and trustworthy money manager is essential to reaching your full investment potential. As talked about before, avoiding any and possibly all sales fees would be in your best interest; buying directly from the mutual fund, instead of using your broker, can save from commission fees. Next, consider expense ratios; a lower expense ratio will yield higher results. Finally, consider the companies involved in the mutual funds. Established companies have the lowest risk, but don’t just look at the past. The market is ever-changing, and things will always change.
The last thing to consider when investing money into a mutual fund is how you want to pay in. Investing a lump sum can be done by putting in all your money at once. This can be good when shares are at all-time lows, but can be risky. Your other option, and generally accepted as safer, is by dollar cost averaging. This is done by investing smaller amounts over time, and is better for those with long-term investing goals. This also can lower the risk of losing money, by spreading investments out over high and low days of the stock market.