November 3, 2018

Investing in Mutual Funds for Dummies

Written By Jack Ryder
Last updated November 20, 2019

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Mutual funds offer an excellent way for investors to make some money in the stock market while generally avoiding being subject to the roller coaster of ups and downs that can result from buying stock in only a few companies. Mutual funds are a particularly good way for new investors or less interested investors to begin investing in the market because they relieve you of the need to become an expert stock trader; instead of you calling the shots with stocks and trying to beat the stock market, they are guided by the knowledge of a professional fund manager. In a way, you could think of mutual funds as investments for dummies — though you’d be no dummy to give them a shot.

Best Investment Companies for Mutual Funds

RankInvestment CompanyBest ForSTL Rating
1Ally InvestOverall Investing★★★★★
3TD AmeritradeInvesting Options★★★★★
4WealthsimpleAutomated Investing★★★★
5Personal CapitalLarge Investments★★★

Best Investment Companies for Mutual Funds

RankInvestment CompanySTL Rating
1Ally Invest★★★★★
3TD Ameritrade★★★★★
5Personal Capital★★★

Just what are mutual funds, anyway? A mutual fund is one single investment product you can buy shares in that is made up of a carefully chosen portfolio or collection of stocks in many different companies. Some funds also contain bonds and other kinds of investments as well as stocks, and each fund has been assembled by someone with expert knowledge. The components of a mutual fund are chosen carefully to balance each other out so that you have the best possible chance of seeing some profit from your investment — a strategy also known as diversification. Because the stock market bounces around quite a bit from week to week, it’s usually a good idea to plan to keep your money in a mutual fund for at least three years after you invest. Generally, most of the stocks in a mutual fund will gain in value over the long term. Mutual funds have managers who carefully watch the behavior of each component in the fund and use their expertise to decide about buying and selling individual stocks in order to keep the whole fund on a good path to achieve the best return for your money.

Mutual funds come in a whole range of different types and categories far more than we can cover in this short overview of investing in mutual funds for dummies. If you love learning about the world of investing, you can become deeply knowledgeable about the world of mutual funds. For starters, you can learn how to use a free mutual fund screener such as the one offered by Morningstar.

Alternatively, you can spend a bit of money consulting a financial advisor who doesn’t represent a particular fund. He or she will give you objective information about good mutual funds, meaning which ones you would be smart to be buying. The main characteristics that investors use to compare different funds are:

Their track record: How profitable has the fund been historically?

Their fees: Some funds charge you a fee every time you add more money, others charge a bit every month; there are many different kinds of fee structures. Some funds are much more expensive than others, so be sure to find out about your costs before deciding to invest.

Their risk level: Even though mutual funds are intended to provide a cushion against risk, some funds are actually created for very adventurous investors who are willing to take bigger chances in hopes of seeing higher returns.

Their focus: If you feel especially passionate about socially responsible investing, or alternative energy, for example, you can find funds which strive to serve these goals while also making a profit.

Here are a few mutual fund reviews of companies that offer both individual mutual fund purchases or stock portfolio building. (Most offer automated investing if you want to leave the heavy lifting to the pros.):

Ally Invest Review

Ally Invest website

Ally Invest Review image
  • Best for: Beginners. Ally Invest makes investing easy and offers a lot of education around investing, so you can make the best decisions when it comes to your money. You can sign up for Ally here.
  • Price: There are no advisory fees for managed account.
  • Features: Ally Invest offers all the typical investing options, including stocks, options, ETFs, IRAs, mutual funds, bonds, forex and trading on the International Stock Exchange.
  • Other highlights: Ally Invest sets aside a “cash buffer” which is about 30% of your investment, so if the markets suddenly crash, you have cash in the account that is safe from wild fluctuations. It also offers an easy-to-use platform and a mobile app, which are benefits for beginners.
  • Customer service: Ally Invest offers customer service both for technical issues and when you have questions about trading. It has brokers on hand to help with any of your investment questions.

Betterment Review

Betterment website

Betterment Review image
  • Best For: Automated Investing. Betterment is the lazy man’s best friend and is also great for anyone just starting out in investing, since it automates trading for you. All you do is fund your account and answer questions about the types of investments you want, and Betterment will do all the heavy lifting for you. You can sign up for Betterment here.
  • Price: The benefit of Betterment is there are no complicated fees, just a percentage charged depending on how much you’ve invested. It’s 0.25 percent annually, no minimum required. For the premium service you must invest at least $100,000, the fee for this is 0.40 percent annually.
  • Features: Since Betterment is an automated service, it doesn’t offer a lot of options when it comes to investing. Its main platform invests in both stock and bond ETFs to create your portfolio. You can also set up various forms of IRAs through Betterment, which will then tailor your investments based on your goals.
  • Other highlights: You can currently get a year of free management, all dependent on the amount you invest. If you invest between $15,000-$999,999 you’ll receive one month for free, If you invest, $100,000-$249,000 you’ll receive 6 months of free management, and if you invest anything over $250,000 you will get an entire year of free management. 
  • Customer Service: Since Betterment does all the heavy lifting for you, of course there are going to be questions, which Betterment is more than capable of answering. You can also get financial planning advice via Betterment.

TD Ameritrade Review

TD Ameritrade website

TD Ameritrade Review image
  • Best For: Investing options. TD Ameritrade is a well-known online brokerage firm that offers a wide range of investment options, from preferred stocks to college saving plans. You can sign up for TD Ameritrade here.
  • Price: TD Ameritrade has fairly straight-forward pricing, starting at $9.99 per online stock trade.
  • Features: TD Ameritrade is especially popular for its accessibility and user-friendly model, making it particularly attractive to first-time investors. With its one-on-one support system, which is monitored by licensed brokers, it’s also popular with consumers who are interested in investing money but would prefer to be guided by a professional with expertise in trading.
  • Customer Service: TD Ameritrade is one of the only online investing service that also offers physical offices you can go to if you need in-person help with your investments.

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Wealthsimple Review

Wealthsimple website

Wealthsimple Review image
  • Best for: Wealthsimple is best for investors with at least $100,000 to invest, beginning investors with less than $5,000 to invest, people who want their investment choices to align with their values, and people who value human interaction. You can sign up for Wealthsimple here.
  • Price: Wealthsimple charges an account management fee between 0.4 and 0.5 percent annually, depending on whether you have a Basic account with a balance of less than $100,000, or a Black account. Neither account is charged trading, account transfer or rebalancing fees. Wealthsimple charges only an investment management fee, though managers of the funds you invest in will likely charge a fee that annualizes to about 0.2 percent.
  • Features: All Wealthsimple accounts feature automatic portfolio rebalancing, dividend reinvesting, automatic deposits, live financial advice from experts and tax-loss harvesting. Wealthsimple Black accounts, for investors with more than $100,000, also provide financial planning sessions and VIP airline lounge access in more than 400 cities around the world.
  • Customer Service: The Wealthsimple Relationship Management team can answer questions regarding opening and funding accounts, your application, investment portfolio or financial plan, and they’ll connect you with a Portfolio Manager through a scheduled call when they cannot answer your question. Customer service is available by phone, Monday through Friday from 8 a.m. to 8 p.m. Eastern Standard Time, and by email.

You have probably heard of some of the big fund companies, such as E*Trade or TD Ameritrade. Some of these companies sell their own funds, and they also function as “supermarkets,” allowing you to purchase funds from other brokerages through them.

Because of special tax laws associated with mutual funds, you have to do some paperwork before buying shares. Some companies let you do this all online, and others will ask you to come to their physical office for the initial registration. Your 401(k) plan may also offer you the chance to buy mutual funds, and many independent financial advisors handle these types of transactions as well.

Mutual funds are a useful investment tool for building your net worth, and they offer a truly interesting realm of possibilities. While you aren’t guaranteed to earn a profit on your investment, mutual funds are safe enough to be part of most good savings and retirement portfolios.

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