Mutual funds are among the most recommended investment vehicles for neophyte investors. They allow small time investors to form a well-diversified portfolio even if they don’t have a lot of money. It is very difficult for those with limited means to make diverse investments of stocks and bonds if they don’t have sufficient cash but with mutual funds, this limitation is overcome.
If this is the first time for you to invest in a mutual fund, you are no doubt overwhelmed with the many steps that you need to undertake to be able to do so. To help steer you in the right direction for investing in a mutual fund, here are the steps you need to take:
1. Formulate your investment objective.
The first thing you need to do before making any investment—mutual funds included—is to determine what your objective is. Among the questions you need to answer at this point is the reason why you are making such an investment, when you will be using the money and the level of risk you are willing to take with your investments.
Knowing what your investment goals are is essential because this will guide you in making the right asset allocations tailored to the level of risk you are willing to take. For example, if you want to maximize the growth of your investments and are comfortable with taking a lot of risk, stock funds might be right up your alley. However, if you prefer a safer path even if the earnings are not as high, bond funds might be the better option.
Whatever your investment objective, make sure that it takes into consideration your overall financial situation.
2. Screen the mutual funds using an online tool.
There are thousands of mutual funds available so choosing the best ones is virtually impossible to do on your own. You’ll need help. There are a lot of mutual fund screeners that can help you narrow down your choices. By simply typing the keywords “mutual fund screener” on Google Search, the results will show that screeners from Yahoo!, Wall Street Journal, Bloomberg and MarketWatch, among others.
The mutual fund screener from Bloomberg, for example, asks you to choose information like the country of listing, the asset class you want to focus on, the type of fund, the fund objective, value of the assets and questions regarding fees and expenses and fund performance. After you have filled in the choices, just click “Find Funds” and the results will be provided. Other mutual fund screener works in a similar manner.
3. Look for funds that meet your objective.
The next step involves matching the first and second steps. From the different kinds of funds available, choose the one that best meets your investment goals. For instance, if you intend to invest for retirement and you are still young, you might want to consider mutual funds that focus on stocks that have a high promise of growth.
If your investment objective is to buy a house then you might want to consider putting your downpayment savings in mutual funds that invest in short-term bonds or money market mutual funds that are less risky. It would also be a good idea to invest in a combination of stocks and bonds if your objective is medium term.
4. Factor in the fees.
One of the most important considerations in selecting a mutual fund is the fee charged by mutual fund firms. The fees that are charged when you buy and sell shares in mutual funds are called loads. The expense ratio refers to the operating expenses of the fund. This covers the advisor’s management fee, recordkeeping costs, taxes, accounting, legal fees and auditing fees.
It’s imperative that you know what the loads and expense ratios of the mutual fund company are since these can greatly diminish your returns if you’re not careful. Let’s say the mutual fund firm charges a load of 5 percent and an expense ratio of 2 percent. The fund will need to generate a return of 8 percent annually just to be able to make a gain of one percent. Mind you, a return of 7 percent to 8 percent is difficult to achieve.
It would be to your best interest to look for mutual fund firms that don’t collect loads (no-load funds) and charge very low expense ratios. Index funds usually don’t charge loads.
5. Take into consideration your penchant for risk.
Just as in any investment vehicle, you need to look at your penchant for risk to determine the mutual fund that best suits your needs. If you are willing to take more risk with your investments for better returns, growth equity funds are preferable to short-term bond funds.
6. Invest in the mutual fund of your choice.
The final step in the process is investing your money with the mutual fund you have chosen. You can visit the office of the mutual fund firm if it’s nearby to jumpstart the investment process or you can easily invest through the fund’s website. The process of investing through the fund’s website is easy. You’ll only need to follow the instructions and you’ll have made your first investment in a mutual fund.
If you have plans to invest in many different mutual funds, you can opt to do business with a brokerage firm instead. Fidelity and Schwab are some of the brokerage firms that enable you to invest in various mutual funds with ease.
When investing in mutual funds, you can do so through full-service brokers, discount brokers and online brokers. Let’s look at them in more detail:
Full-service brokers provide comprehensive advice to investments. This type of broker guides your investment decisions, researches the various options and comes up with a portfolio that enables you to attain your goals. Those who get the services of brokers usually have all kinds of financial products in their portfolio and not just mutual funds. They usually have stocks, bonds and other investment vehicles like insurance and real estate in their portfolios.
Because full-service brokers provide comprehensive service, they are also the most expensive. They get commissions with every transaction.
Discount brokers provide a cheaper alternative to full-service brokers. They facilitate the transaction of clients when it comes to buying and selling stocks. However, they don’t provide research and advice about the best investments to put in your portfolio. If you get the services of a discount broker, be prepared to do a lot of reading and research since this isn’t part of his package of services. The advantage of discount brokers is that they don’t charge as much, allowing you to save with every transaction.
The birth of online brokers came with the birth of the Internet. This is the do-it-yourself option for investors. Because these brokers have very low overhead costs, they are able to offer their services for cheap. For as long as you have a computer with a stable Internet connection, you can buy and sell stocks yourself. If you go this route, however, you need to be ready to do the research on the mutual fund company you want to invest in on your own. This time, decisions about the kind of securities you want to purchase or offload, when you want to sell or buy them and your desired price, will have to be made solely by you. Thus, you need to have basic knowledge, at the very least, of the world of mutual funds.
Investing in mutual funds can be overwhelming at first. For starters, the many different types of mutual funds available can be a source of confusion for investors. Not knowing one’s investment objective also complicates matters as choosing a mutual fund can turn into a hit-or-miss proposition.
However, this initial fear can be overcome by performing the necessary research and knowing your reason for investing. When you know what you are getting into, your anxiety is lessened and you can make better investment decisions.
You should also factor in the kind of broker you want to work with when you begin to invest. Full service brokers offer the most comprehensive advice but are also the most expensive while discount brokers are ideal for those who would like to do the research on their potential investments themselves. To cut costs further, you can also opt to perform the transactions yourself using online brokers. Choosing the best broker that would fit your needs will depend on the time you have for your investments, your ability to do research and the kind of portfolio you want to form.
Mutual funds are the best kind of investment vehicles for beginner investors. They are affordable and don’t require a lot of money to begin. Mutual funds also provide a diversified portfolio for very little cash. Thus, it would be to your best interest to make mutual funds part of your nest egg.
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