Buying mutual funds is much easier than you might think it is. First, you need to decide which funds are best for you or your situation. After you determine that, it gets even easier since you can buy them from a few different places such as the following:
through a brokerage company.
through a mutual funding company.
through your employer’s retirement plan.
Any of these choices are great for beginning investors as well as long-time investors and professionals.
Mutual funds are accessible and easy for beginners to work with. But they are also versatile enough for veteran investors and professionals to use when building client portfolios.
What is asset allocation?
It is an investment strategy whose goal is to balance risks, measure a portfolio’s assets depending upon an investors goals, risks, and investment outlook.
Different Types of Mutual Funds
As mentioned previously, there are a variety of mutual funds available for investments. The following are the different types of mutual funds.
Money market funds – money market funds invest in short term fixed income securities such as government bonds, banker’s acceptances, commercial paper, treasury bills, and CDs. While they may have a lower potential of return, they are usually a safe investment.
Fixed income funds – these buy investments that have a fixed rate of return like government bonds, high yield corporate bonds, and investment grade corporate bonds. Their goal is to have money coming in on a consistent basis.
Equity funds – They invest in stocks. Their goal is to grow your money faster than some others and the risk is higher that you could lose money. There is a variety of equity funds that you could invest in.
Balanced funds – These funds mix equities and fixed income securities. They also often have less risk than equity funds, but more risk than fixed income funds.
Index funds –These funds track an index and go up or down depending on when the index goes up or down. They normally have lower costs than the other funds.
Speciality funds – They focus on directives such as real estate, commodities, and responsible investing.
Fund of Funds – As the name implies, these funds invest in other funds. In some ways, they are similar to balanced funds where they try to make asset allocation and diversification much easier for the investor. Unlike the stand-alone funds mentioned, the MER (management expense ratio) on these types of funds is higher.
Here are five easy ways to invest in mutual funds for beginning investors or veteran investors, these steps will make your journey much easier.
1. Do it Yourself or Hire an Advisor?
Would you rather deal with investing yourself, or hire a professional to invest for you? However, know that you do not need to hire a professional advisor to buy and invest in mutual funds. This is especially true if you have simple investment needs and like to do things your own way. But if anything about investing in mutual funds perplexes you, then consider hiring an expert for guidance should your budget allow you to.
Another reason you could use to hire a professional is if you have no desire to research, monitor, buy more funds, evaluate your goals or to engage in the follow-up work that is needed. Should you decide to do it yourself, consider opening an account at a reputable no-load mutual fund company. Some good companies to read up on are Vanguard, Fidelity, or T. Rowe Price. You could even use a broker that offers discounts like Charles Schwab or Ameritrade.
2. Educate Yourself on How to Put Together a Portfolio
Creating and having a portfolio of mutual funds is an excellent idea. But in order to do so, you will need to educate yourself on how to build a mutual fund portfolio. Before you decide on purchasing the mutual fund, you should at least have a solid plan, purpose, and goal in mind for the fund. Complicated plans and too many hours of preparation are not necessary when investing in mutual funds.
How do you feel about the risk of investing your money? What are the basics of asset allocation? These questions should be answered first before moving forward with your investment. How do you know which mutual funds are the most beneficial to you? You’ll need to understand how to decide on a variety of mutual fund types for your investment or savings goals. Once you have laid down your investment foundation, then you can start selecting the mutual funds you’re interested in putting your money into.
3. Choosing the Mutual Fund Type and Its Category
When you understand points one and two, you’re then ready to decide on the fund type you’d like to invest in. Frequently, this is where investors, new or veteran, and professionals either lose interest in the fund or they get lost in the process of selecting the mutual fund.
Beginners who are investing in their very first mutual fund should keep things simple by choosing either a target-date retirement fund, balanced fund, or an S&P 500 index fund. As soon as your portfolio gets large enough, and you learn the portfolio strategies, it’s time to diversify and spread risk over several different mutual fund categories.
4. Educate Yourself on How to Analyze a Mutual Fund
The performance history is highly important but so are some of the other aspects of mutual funds. These include tax efficiency, turnover, and expense ratios, as well as management conditions. All of these need to be compared and analyzed before deciding on the fund you want to purchase
If you have decided on index funds, analyzing would be a waste of time for the most part. AT this point you may want to think about opening an account with Vanguard Investments where you will find the largest collection of index funds that are available to you. A large selection of ETFs (exchange-traded funds) is also available to you at Vanguard.
5. Utilize a Mutual Fund Research Tool
When you understand which aspects of mutual funds are the most important, you’ll want to use the best tools available to research them properly. Be sure to use an online mutual fund research website to find the funds that will be most beneficial to you and fit your personal needs. A couple of example sites are MorningStar and Lipper can help you choose the best fund for you.
Common Investing Methods
The Top – Down
This approach takes a look at the big picture, the economic picture. When doing so, this approach then evaluates industries and even countries that look as if they will do well. Afterward, they then choose to invest in certain companies within the sought out industry or country.
The Bottoms Up
The Bottoms up approach does not concern themselves with company or industry prospects that are projected to do well, it just selects companies that are doing well, even if their futures may be risky.
A Combination of Top and Bottom
With this approach, countries or industries are chosen with the top-down method but the portfolio is built for each country or industry based on the bottoms up method. It puts the best of both worlds together into one.
The Technical Analysis
With the technical analysis approach, past data is studied, and predictions are attempted to be made based on the direction that investment prices seem to be taking.
Another smart thing to remember about mutual fund companies is that they will frequently build up relationships with advisors and try encouraging them to sell their funds, after all, it’s what they do. So when you choose a mutual fund advisor, be sure to find out if they only focus on certain companies or if they look at the big picture and consider larger categories of funds.
Whether you are a new investor or a long-time investor, these five easy tips are designed to make your search for the right mutual fund much easier. Good luck!