How To Invest In Mutual Funds (2024)

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For most investors, mutual funds are a great way to build a diversified portfolio without a lot of extra cost or hassle. They typically own hundreds if not thousands of different stocks, bonds and other securities, providing you with instant diversification. Follow these seven simple steps to get started investing in mutual funds.

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1. Decide on Your Mutual Fund Investment Goals

What financial goals would you like to reach by investing in mutual funds? Are your goals only a few years away or decades in the future?

If you’re investing for a long-term goal, like retirement or your child’s college education, stock mutual funds are a great choice. You’ve got plenty of time to ride out the inevitable ups and downs of the stock market. While no investment guarantees a return, mutual funds are safer than some other options because you’re invested in a broad range of companies or debts.

If you’re saving for a shorter-term goal, like buying a home or a car within the next few years, a bond market mutual fund might be a better option. Investors who need easy access to their money in the very short term should consider high-yield savings accounts, which provide greater liquidity and are federally insured up to at least $250,000.

2. Pick the Right Mutual Fund Strategy

Once you’ve identified your mutual fund investing goals, you can pick funds with the right investment strategy tailored to your goals.

  • Long-term goals. Long-term mutual fund investing means you have decades to reach your financial goals. With that in mind, your mutual fund allocation should probably be 70% to 100% in stock-based mutual funds to position yourself for the most investment growth. You may look specifically for mutual funds labeled “growth funds” to invest in companies that are expected to grow faster than others. These funds have more risk, but they also have more potential for large gains. Growth mutual funds to consider include the Vanguard Growth Index Fund (VIGAX) and Fidelity Growth Discovery Fund (FDSVX).
  • Mid-term goals. If investing heavily in stocks makes you nervous or you have a goal that’s within five to 10 years away, you may want an approach that reduces the potential for rapid changes in investment value. Balanced mutual funds invest in both bonds and stocks, offsetting some of the risk associated with stocks. Balanced mutual funds to consider include the Vanguard Wellesley Income Fund (VWINX) and the American Funds American Balanced Fund (ABALX).
  • Near-term goals. If you are only a few years away from your goal, your focus should be on minimizing risk so you don’t wind up short money when you need it. You might aim to invest 30% in stock mutual funds and the rest in bond funds. The bond funds will produce a steady income through interest payments while the limited stock component may allow you to see some investment growth. Income-oriented mutual funds to consider include the PIMCO Total Return (PTTAX) and the Vanguard Equity Income Fund (VEIPX).

If you’d prefer to avoid the hassle of picking a portfolio allocation, consider investing in a target-date fund. Target-date funds target a specific year in the future when the investor needs to withdraw their funds and provide a complete, well-diversified allocation of equity and bond holdings. The further from that date, the more the fund invests in riskier assets like stocks. As the target date approaches, the fund gradually adjusts its holdings to lower-risk assets like Treasury bonds.

3. Research Potential Mutual Funds

When researching potential mutual funds to invest in, use tools like the Mutual Fund Observer and Maxfunds. These sites provide detailed information on different mutual funds in multiple categories. Most brokerages’ websites also include mutual fund research tools and screeners for clients.

Consider the following factors to help you refine your list of mutual fund choices:

  • Past Performance. While a fund’s past performance is no guarantee of its future success, how a fund has historically performed can be a good indication of how well the fund is meeting its stated goals. Compare past performance to similar mutual funds or benchmark indices.
  • Expense Ratios. These are annual fees that compensate the fund’s managers and cover the cost of buying the fund’s investments. The industry average expense ratio is 0.57%, but you can find many funds that charge much less. While most expense ratios are less than 1% or 2%, it’s important to pay attention to these as they can drastically impact your money’s growth over time.
  • Load fees. These are sales commissions charged by the broker who sells you a mutual fund. Mutual funds are often classified as “load” or “no-load” funds. Load funds charge commissions while no-load funds do not. You should try to avoid paying load fees, if possible. Given the wide range of funds available, you should be able to find comparable investments without fees.
  • Management. Actively managed mutual funds aim to beat the performance of an underlying index. They usually charge higher fees and offer the potential for richer returns. Passively managed mutual funds—or index funds—aim to duplicate the performance of an underlying index.

They typically charge lower fees than actively managed funds. Historically, passively managed index funds have outperformed actively managed funds over the long term.

4. Open an Investment Account

If you participate in an employer-sponsored retirement plan at work, such as a 401(k) or 403(b), you already have access to mutual funds. Most retirement plans direct your contributions to mutual funds rather than individual stocks or bonds, and you can typically elect to invest in target-date funds if you’d prefer to automate your portfolio management.

If you don’t have access to an employer-sponsored retirement account or are investing for a goal outside of retirement, you can invest in mutual funds by opening a brokerage account on your own and investing in the following plans:

  • Individual retirement accounts (IRAs). You can invest in mutual funds for retirement via tax-advantaged IRAs.
  • Taxable brokerage accounts. Taxable accounts at an online broker lack the tax benefits of 401(k) plans or IRAs, but you can make withdrawals at any time without paying penalties. This makes them particularly well suited for goals you’d like to achieve before 59 ½, the federal retirement age.
  • Education savings accounts. If you have children and want to save for their college education, you can open a 529 college savings account and invest in mutual funds.

5. Purchase Shares of Mutual Funds

To start investing in mutual funds, make sure you have enough money deposited in your investment account. Keep in mind that mutual funds may have higher investment minimums than other asset classes. For example, Vanguard’s minimum investment for actively managed mutual funds is $3,000. Other investments, like individual stocks or ETFs, generally do not have these kinds of minimums.

You can also buy ETFs and stocks at any time during the trading day. Mutual funds, on the other hand, only trade once per day after the market closes. This distinction may not be important for those who are investing for longer-term goals and who aren’t trying to make a quick buck through market swings.

While it might seem mutual funds trail stocks and ETFs, they do edge those other investments out in one key way: it’s generally easier to purchase fractional shares of mutual funds. This means you can invest any dollar amount instead of being limited to investing only in intervals equal to whole share prices. This lets you get more of your money invested and growing in the market sooner.

That said, while historically, you haven’t been able to do fractional investing with ETFs or stocks, increasingly more brokerages and micro-investing platforms are enabling clients to buy partial shares of ETFs and certain stocks.

6. Set Up a Plan to Keep Investing Regularly

Investing isn’t a one-off event for most people, and if you plan to grow wealth or reach money goals, you’ll want to establish a plan to keep investing. Your brokerage trading platform can help you set up recurring investments on a daily, weekly or monthly basis so you don’t have to remember to deposit money into your account every time you want to invest.

Not only does this help you grow money, but it also may help you pay less per share thanks to an investing principle called dollar-cost averaging. By investing a set dollar amount regularly, you reduce the risk that you buy a lot of mutual fund shares when prices are extremely high. And on the flip side, because you’re investing a set amount of dollars, your money buys more shares when prices are low. Over time, this may reduce the average price you pay per share.

You’ll also want to set up a plan to check in on your investments at least once a year. This will give you a chance to rebalance your portfolio and make sure that its asset classes still match the level of risk you want to take on to meet your goals. Portfolio rebalancing is important, so if this prospect sounds daunting to you, you might look into robo-advisors, which are automated platforms that generally offer this service as part of their management services.

7. Consider Your Exit Strategy

Eventually, you’ll want to sell your mutual fund shares to pay for your financial goals, such as making withdrawals during retirement.

If you bought mutual funds with backend loads, you’ll have to pay a fee to your broker when you cash out. You’ll also probably owe taxes on any capital gains your investments made unless you held them in a Roth IRA or Roth 401(k). Consider speaking with a financial advisor or tax professional to determine strategies to minimize the taxes you may owe on your investments.

Mutual Fund FAQs

What Are Mutual Funds?

Mutual funds are investment vehicles that allow groups of investors to combine their financial resources to purchase large portfolios of stocks, bonds and other securities. They’re a good investment option for the average investor since a single share of a mutual fund gives you exposure to hundreds of stocks or bonds. This diversifies your investment dollars and reduces the risk that any one company will cause your investment to lose value.

How Do Mutual Funds Work?

Mutual funds invest in baskets of securities, like stocks and bonds. A fund manager decides what to include in the mutual fund and when to buy and sell holdings. For people who don’t have the time, education, money or willingness to manage a large portfolio of investments, mutual funds are an excellent option.

Are Mutual Funds a Good Investment?

For many people, mutual funds are a better investment choice than individual stocks and bonds for the following reasons:

  • Professional management. The fund manager does all of the research and monitors the performance of the securities for you.
  • Diversification. By investing in a mutual fund, you invest in a range of securities rather than just one or two.
  • Low Costs. Mutual funds are relatively affordable and let you purchase hundreds of securities for a fairly low cost.

What’s the Difference Between a Mutual Fund and an ETF?

Mutual funds and exchange-traded funds (ETFs) both involve investing in baskets of securities and are generally less risky than investing in individual stocks or bonds. However, there are a few key differences:

  • Trading Options. You can buy and sell ETFs throughout the day with real-time pricing. By contrast, mutual funds can only be bought or sold at the end of the day after the market closes. Again, for long-term investors this distinction may not be significant as you aren’t generally trying to time the market for particular prices.
  • Lower costs. ETFs never charge load commissions, and trading ETFs is free of commissions at most brokerages. This is not always the case with mutual funds, so make sure you understand any applicable fees your brokerage may charge before buying mutual funds there. ETFs are nearly always passive investments, like index funds, and charge much lower expense ratios than actively managed mutual funds. Some mutual funds, however, are index funds like ETFs and charge comparable expense ratios.

Which Mutual Funds Should I Buy?

Identifying the best mutual funds is dependent on your financial goals and risk tolerance. However, one of the most popular mutual fund strategies is to take advantage of index funds. Index funds are mutual funds that track the performance of a certain stock market index, such as the Dow Jones Industrial Average, the NASDAQ Composite Index or the . With index funds, you don’t have to worry about picking winning stocks yourself. And while index funds’ performance will never exceed the overall market’s, historically, they do generally outperform actively managed mutual funds that charge higher fees.

As an enthusiast with a deep understanding of mutual funds and investing, I can confidently provide insights into the concepts discussed in the provided article. My knowledge is backed by extensive research, practical experience, and a thorough understanding of the financial markets. Let's delve into the key concepts mentioned in the article:

  1. Mutual Fund Investment Goals:

    • The article emphasizes the importance of defining your investment goals before selecting mutual funds. Different goals (short-term, mid-term, long-term) require different investment strategies.
  2. Mutual Fund Strategies:

    • Long-term goals are suited to stock-based mutual funds, with examples like Vanguard Growth Index Fund and Fidelity Growth Discovery Fund mentioned.
    • Mid-term goals may benefit from balanced mutual funds that invest in both stocks and bonds, such as Vanguard Wellesley Income Fund and American Funds American Balanced Fund.
    • Near-term goals might involve a mix of stock and bond funds for reduced risk, with examples like PIMCO Total Return and Vanguard Equity Income Fund.
  3. Researching Potential Mutual Funds:

    • The article suggests using tools like Mutual Fund Observer and Maxfunds for detailed information on mutual funds.
    • Factors to consider include past performance, expense ratios, load fees, and management style (actively managed vs. passively managed).
  4. Opening an Investment Account:

    • Different account types for investing in mutual funds are discussed, including employer-sponsored retirement plans (401(k) or 403(b)), individual retirement accounts (IRAs), taxable brokerage accounts, and education savings accounts (529 plans).
  5. Purchasing Shares of Mutual Funds:

    • The article highlights the importance of having enough funds in your investment account to meet mutual fund minimum investment requirements.
    • Mutual funds trade once per day after the market closes, distinguishing them from ETFs and stocks. Fractional investing in mutual funds is mentioned as an advantage.
  6. Setting Up a Regular Investing Plan:

    • Establishing a plan to invest regularly is recommended, with the option to set up recurring investments. Dollar-cost averaging is explained as a strategy to mitigate market volatility.
  7. Consideration of Exit Strategy:

    • The article advises considering an exit strategy, especially for goals like retirement. Factors include backend loads, taxes on capital gains, and potential discussions with financial advisors or tax professionals.
  8. Mutual Fund FAQs:

    • Definition and benefits of mutual funds are explained, emphasizing diversification, professional management, and lower costs.
    • A comparison between mutual funds and ETFs is provided, focusing on trading options, costs, and the distinction between actively managed and passive investments.

In conclusion, this article serves as a comprehensive guide for investors looking to understand the nuances of mutual fund investing, covering aspects from goal setting to exit strategies. The inclusion of real-world examples and practical advice enhances its credibility and utility for readers seeking to navigate the world of mutual funds.

How To Invest In Mutual Funds (2024)

FAQs

How To Invest In Mutual Funds? ›

Investors can buy direct mutual funds directly from the fund house or through their designated platforms, with transactions linked to their bank accounts. The demat account, commonly used for equity shares, is not a standard requirement for direct mutual fund investments.

How do beginners invest in mutual funds? ›

How to Start Investing in Mutual Funds?
  1. Determine financial objective and investment horizon. ...
  2. Assess risk tolerance. ...
  3. Choose the mutual fund type. ...
  4. Decide on an active or passive management style. ...
  5. Check the performance of shortlisted funds. ...
  6. Analyze the expense ratio. ...
  7. Check the liquidity and size of the fund.
Sep 6, 2023

How do I directly invest in mutual funds? ›

Investors can buy direct mutual funds directly from the fund house or through their designated platforms, with transactions linked to their bank accounts. The demat account, commonly used for equity shares, is not a standard requirement for direct mutual fund investments.

Are mutual funds a good way to invest? ›

Mutual funds are generally considered a safer investment than stocks because they offer built-in diversification—something that helps mitigate the risk and volatility in your portfolio.

Can I invest in a mutual fund on my own? ›

Once upon a time, back in the analog age, investors could only buy and sell mutual funds through financial professionals: brokers, money managers, and financial planners. But online investment platforms have made traders of us all, and today, anyone with a computer, a tablet, or even a smartphone can buy mutual funds.

Can I start a mutual fund with $100? ›

Many mutual fund minimums range from $500 to $3,000, though some are in the $100 range and there are a few that have a $0 minimum. So if you choose a fund with a $100 minimum, and you invest that amount, afterward you may be able to opt to contribute as much or as little as you want.

How much money should I start with in a mutual fund? ›

Mutual funds require minimum investments of anywhere from $1,000 to $5,000, unlike stocks and ETFs, where the minimum investment is one share. Mutual funds trade only once a day after the markets close. Stocks and ETFs can be traded at any point during the trading day.

How can I make money fast with mutual funds? ›

How do I make money with mutual funds? If you own a mutual fund, you're considered a shareholder. You can make a profit from your investments in one of two ways: through dividends or capital gains. Dividends are a reward to shareholders for holding onto certain stocks or mutual funds for the long term.

Which mutual fund is best? ›

BEST MUTUAL FUNDS
  • LIC MF Flexi Cap Fund Direct Plan Growth Option. ...
  • Mirae Asset Flexi Cap Fund Direct Growth. ...
  • Axis Flexi Cap Fund Direct Growth. ...
  • Canara Robeco Flexi Cap Fund Direct Plan Growth Option. ...
  • Sundaram Flexi Cap Fund Direct Growth. ...
  • SBI Flexicap Fund Direct Growth. ...
  • Navi Flexi Cap Fund Direct Growth.

Which mutual fund to start with? ›

Aggressive hybrid schemes (or erstwhile balanced schemes or equity-oriented hybrid schemes) are ideal for newcomers to equity mutual funds. These schemes invest in a mix of equity (65-80%) and debt (20-35). Because of this hybrid portfolio they are considered relatively less volatile than pure equity schemes.

What is one downside of a mutual fund? ›

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

What is downside in mutual fund? ›

Downside risk is a general term for the risk of a loss in an investment, as opposed to the symmetrical likelihood of a loss or gain. Some investments have an infinite amount of downside risk, while others have limited downside risk.

What are the five cons of a mutual fund? ›

Potential Cons
  • High fees. Mutual funds have expenses, typically ranging between 0.50% to 1%, which pay for management and other costs to operate the fund. ...
  • Market risk. Just as with stocks and bonds, mutual funds generally have market risk, meaning that prices can fluctuate up and down. ...
  • Manager risk. ...
  • Tax inefficiency.
Oct 6, 2023

Can a mutual fund go to zero? ›

The chances of a mutual fund becoming zero are very low. This is because a mutual fund invests in several assets. So, even if a few assets do not perform well, other assets can generate returns. This can balance the losses of non-performing assets.

Are mutual funds taxed? ›

If you hold shares in a taxable account, you are required to pay taxes on mutual fund distributions, whether the distributions are paid out in cash or reinvested in additional shares. The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year.

Is it OK to invest in only one mutual fund? ›

Over-Diversification of Mutual Funds

The aim of diversification is to spread risk. If you invest too much in one company's stock, you are at great risk. If something happens to that company, a significant portion of your money could get wiped away. So to mitigate that risk, you buy shares of many companies.

Which mutual fund is best for beginners? ›

Overview of the Best Mutual Funds for Beginners
  • Quant Small Cap Fund. ...
  • Quant Infrastructure Fund. ...
  • SBI Tax Advantage Fund-III. ...
  • Quant ELSS Tax Saver Fund. ...
  • Nippon India Small Cap Fund. ...
  • Axis Small Cap Fund. ...
  • Quant Mid Cap Fund. ...
  • ICICI Pru Smallcap Fund.
Mar 28, 2024

Are mutual funds good for beginner investors? ›

Mutual funds are good options for both beginners and more experienced investors alike. Both types of investors will benefit from the diversification benefits of mutual funds, and experienced investors can find funds that target specific areas they think are poised for growth.

What to learn before investing in mutual funds? ›

10 things investors should check before investing in mutual funds
  • Investment Goals. ...
  • Fund Type and Category. ...
  • Fund Performance. ...
  • Pedigree and Age of Fund House. ...
  • Expense Ratio. ...
  • Risk Factors. ...
  • Exit Load and Liquidity. ...
  • Tax Implications.
Sep 22, 2023

How do I make money from mutual funds? ›

If you own a mutual fund, you're considered a shareholder. You can make a profit from your investments in one of two ways: through dividends or capital gains. Dividends are a reward to shareholders for holding onto certain stocks or mutual funds for the long term.

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