A diversified basket of mutual funds that meets your overall preferred level of risk allows your portfolio to experience some growth rather than merely preserving your capital. Within your overall investment account, you want to reserve at least 5 percent of your assets in cash so you can take advantage of opportunities as they arise. Money market funds generally have the lowest risk level. Stock funds and bond funds are generally higher risk funds. Target date funds carry a mix of investments and are best if you have a specific retirement date in mind.
You can learn a lot about mutual funds by reading on the internet, especially at the website of the U. S. Securities and Exchange Commission (SEC), which regulates mutual funds. You also can download a complete consumer guide to mutual funds at https://investor. gov, which will walk you through all the details of the market generally and provide guidance on investing wisely.
These services also detail all fees and charges related to each mutual fund. These expenses can eat into your returns significantly, so you need to research each fund carefully before you commit any money. Look beyond the name of a fund. Just because a fund carries the name of a particular bank may not mean that bank still runs that fund. A fund called a “stock fund” may carry other investments besides corporate stock.
Investing in index mutual funds is typically considered a safe and easy way to get into investments. [5] X Expert Source Dmitriy FomichenkoFinancial Planner Expert Interview. 30 June 2020. Index-based funds typically have lower fees than actively-managed funds, but they also run the risk of underperforming once you take fees and taxes into account.
Some funds offer several different share classes, typically A, B, and C classes. Each class has a different fee structure. The length of time you plan to hold your shares can help you determine which share class is most appropriate for you.
Especially if you are a beginning investor, you may feel more comfortable with the advice and guidance of an experienced broker. However, you can get similar advice for free from advisors who work for the mutual fund company you choose.
The “expense ratio” charge, on the other hand, is unavoidable. This fee goes to pay for company overhead. Choose a fund that charges an expense ratio of 1 percent or less. Keep in mind that a fund that charges higher fees must significantly out-perform a fund with lower fees for you to realize the same return. Generally, it’s wisest to go with the fund that has lower fees. [9] X Trustworthy Source Investor. gov Website maintained by the Securities and Exchange Commision’s Office of Investor Education and Advocacy providing free resources about investing. Go to source
To minimize capital gains taxes, look for mutual funds with relatively low turnover ratios. Since these funds hold their stocks and bonds for a long time, they generate less capital gains and losses. If you want to keep your tax consequences low, look for a tax-managed fund. These types of funds are specifically designed to minimize your capital gains tax burden as much as possible. [11] X Research source
Study the prospectus carefully before you purchase any shares in the fund. If you have any questions, the fund company typically will have advisors available to assist you.
Your fund portfolio has the best chance of long-term success if you diversify across a number of unrelated asset classes. This could include domestic or international stocks or bonds, commodities, and other sectors of the economy such as utilities, real estate, precious metals, energy, biotechnology, medicine and finance. Spreading your money across asset classes means downward movement in one particular industry won’t have a significant negative impact on your portfolio.
Don’t worry too much about short-term fluctuations. Pick funds with good histories and stick with them over the long haul. Short-term returns of less than a year or two can be distracting and misleading. Base your choice on returns from the past ten years or longer to accurately assess the quality of the fund. Keep in mind that even experienced investors can fall victim to “performance chasing,” in which they read about high-performing funds and move on them quickly. Mutual fund investing requires patience. Understand that past performance is no predictor of future performance.
Online investment firms typically have competitive fee structures and varied fund selections for investors willing to take a do-it-yourself approach to investing in mutual funds. You must carefully monitor the performance and allocation of your mutual fund holdings yourself. However, most online investment management firms have tools and guidance sections to help beginners. [16] X Research source You may prefer the guidance of a professional if you have a more sizable portfolio. Look for a fee-only financial advisor who can alleviate the burden of self-selecting and monitoring the mutual funds in your various accounts. Keep in mind that while banks and credit unions offer access to mutual funds, they may charge higher fees or commissions and have a more limited selection of funds. You also should remember that a bank’s mutual fund is not a bank deposit and is not FDIC-insured. [17] X Trustworthy Source U. S. Securities and Exchange Commission Independent U. S. government agency responsible for regulating the securities industry, which includes stocks and options exchanges Go to source
For example, suppose you have $100,000 which you have spread evenly across four different funds. However, at the end of the year, one fund has out-performed the rest so that it is now 30 percent of your portfolio rather than 25 percent. To rebalance your portfolio, you would want to take 5 percent of your shares in that fund and transfer them to the other funds in your portfolio. If your funds are held in a tax-deferred account such as a 401k, transferring assets between funds typically is your best option. However, with taxable accounts it’s generally better to simply add new contributions to the lower-performing funds to rebalance. This way you can avoid paying taxes on the assets you sell and transfer.
You can think of this as adhering to the general stock investment strategy of buying low and selling high. You typically can buy more shares in a lower-performing fund, so you’ll realize a greater return when it bounces back. Rebalancing your portfolio in this way will put you further ahead in the long-term than other strategies.
Ultimately, anyone can be a successful investor, and mutual funds are a great investment vehicle for beginning investors. However, you must have a plan to invest and the discipline to stick to that plan. Avoid making decisions based on emotions or out of desperation. If you are questioning your motives for making an investment decision, talk to an advisor who can be objective.
You also should watch out for funds that change managers, especially if this happens suddenly. Different managers may have different strategies that could significantly affect performance. Be on the lookout for changes that mean the fund at present has changed character so much that it’s no longer the same fund in which you originally invested. Replace it with a fund that more closely matches your original goal for that fund within your portfolio.
