Mutual funds offer an excellent way to make some money in the stock market without being subject to the roller-coaster ups and downs which can result from buying stock in only a few companies. Mutual funds also relieve you of the need to become an expert stock trader, because they are guided by the knowledge of a professional fund manager.
What is a mutual fund?
A mutual fund is one single investment product you can buy shares in, which is made up of a carefully-chosen 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. 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. Most of the stocks in the 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 these individual stocks in order to keep the whole fund on a good path.
How do I choose a mutual fund?
Mutual funds come in a whole range of different types and categories – far more than we can cover in this short overview. 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 funds to buy. 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.
You have probably heard of some of the big fund companies, like Scottrade, 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 in 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 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.