Mutual funds are an easy and less risky way to invest, especially for those new to investing. The benefits of these funds include professional investment management and diversification of risk. All the funds are run by experienced professionals and each fund invests in multiple securities rather than just few stocks or bonds. In this article, we provide an overview of the basics of mutual fund investing.
How to invest in mutual funds
Investing in mutual funds can be done directly by opening an account with a mutual fund company. Investors can also buy shares via personal brokerage accounts or through financial advisors. Mutual funds have minimums that need to be contributed in order to start investing. These differ among the funds. Often, at least $500 needs to be deposited, and subsequent deposits need to be at least $100. This threshold is lower when it comes to investing in retirement accounts such as IRAs.
Costs of investing in mutual funds
There are several fees when it comes to investing in mutual funds. There’s a management fee and it also differs among the funds. In addition, 12b-1 fees are charged for marketing and administrative expenses. Overall, investors can expect to pay around 2% per year, or more, based on the amount invested.
Moreover, some funds have loads. Class “A” loads charge a fee when shares are purchased. This is the spread between bid and ask. Class “B” loads are charged when the shares are sold, and there may be no charge if the shares are held long enough. With Class “C” shares, the charges may apply when shares are bought and sold.
What’s more, if investors buy shares with their online brokerage accounts, a transaction fee may be charged. However, there are no transaction-fee and no-load funds. Meanwhile, those investors looking save on management fees can select low cost mutual funds such as index funds that are passively rather than actively managed.
Types of mutual funds
There are many types of mutual funds. Among the most popular are Equity Funds which specialize in investing in stocks. Within this type, there are many different funds. Some invest in growth stocks, while others concentrate on value. There are funds that invest in large, medium, or small cap stocks, and those that focus on domestic or international markets. Some specialist funds may only focus on specific industries or countries.
Another major type of mutual funds concentrates on bonds and fixed-income products. These may include corporate bonds, sovereign debt, municipal bonds, and foreign issues. Investors can also choose Balanced Funds, which mix equity and fixed-income investments. The selection is huge. Beginning investors should first concentrate on diversifying their investments, and then consider more concentrated investments such as country or industry funds.
Mutual fund ratings
Companies such as Morningstar give ratings to mutual funds based on their past performance and future outlook. When it comes to Morningstar, the highest rating for performance is 5 stars, while the lowest is 1 star. When it comes to the future outlook, the Gold rating given by Morningstar is the best, followed by Silver, Bronze, Neutral, and Negative outlooks.
Mutual fund prospectuses and fact sheets
Morningstar isn’t the only source where information get be obtained about mutual funds. The fund companies provide detailed prospectuses about their own funds. These, however, may be too intimidating and difficult to understand by investing newbies. So, to make it easier, there are so-called Fact Sheets provided, which summarize important information.
These documents typically contain information about the investment style of the fund, its major holdings, past performance, management, and fees charged. All investors should review this information prior to investing.
Money market funds
Money market funds are also considered to be mutual funds, but carry much lower risks. These funds concentrate on short-term investments, and invest in secure and liquid assets such as commercial paper, certificates of deposit, bankers acceptances, short-term corporate bonds, and treasury bills. Because of the low risk, these funds return only a small percentage in gains.
Mutual fund investing can be a good alternative for investors. But, there are other ways to invest as well. Some include index funds (mentioned before) that carry lower fees, or Exchange-Traded Funds (ETFs), which also invest in a variety of assets, while charging smaller fees.
Damian Wolf is a businessman and member of the content team for finance oriented known as AZSmarter. He mostly covers investment tips and finance preparations for retirement. When he’s not occupied with finance topics, Damian enjoys in cycling, football and books.