Understanding the Basics of Investing in Mutual Funds

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Mutual Funds

When people think of investing in the stock market, they often imagine purchasing stocks or pieces of publicly traded companies. But when it comes to retirement or safe investing overseen by professionals, many put their money into mutual funds instead.

Despite their growing popularity, many people don’t know what mutual funds are, how they work, or why they should invest in them. Today, let’s explore the basics of investing in mutual funds so you can determine whether putting your money in one of these vehicles is a wise decision.

Mutual Funds in a Nutshell

Mutual funds, put simply, are collections of stocks or other financial assets. For example, a mutual fund might be comprised of 10 stocks from 10 distinct companies. The mutual fund as a whole operates as a financial asset with shares just like company stocks.

Investors can then purchase shares in mutual funds rather than having to purchase individual shares from multiple different companies. In the above example, an investor could purchase one share in the mutual fund, which has its value derived from the total value of its included assets.

In this way, the investor invests in 10 different companies just by purchasing a share in a mutual fund. Mutual funds are, therefore, easy and efficient ways for investors to diversify their assets and put their money in multiple companies or organizations simultaneously.

If one company fails or its stock declines in value, however, the mutual fund’s value only declines slightly. It’s much safer to put your money in a mutual fund if you want to cultivate a diverse portfolio in most cases.

Mutual Fund Management

Most, but not all, mutual funds are managed by teams of active investment managers. These are financial officers who make decisions on behalf of the mutual fund and its clients, like whether to add new stocks to the fund, sell stocks, reorganize their assets, etc.

How Are Mutual Funds Traded?

Mutual funds are treated differently from regular stocks or other investment assets. You can only purchase or sell shares of a mutual fund once at the end of every market day. You cannot, for instance, buy or purchase mutual fund shares whenever you like or throughout active market hours.

Due to this limitation, mutual funds often inspire a safe kind of investment strategy or methodical approach for their investors. This can be an advantage depending on your financial goals and how you like to operate in the stock market.

Fees and Charges for Mutual Funds

Generally, mutual funds do not levy commission fees when you buy or sell one of their shares. However, mutual funds do include fees such as:

  • Load fees whenever someone buys or redeems a share
  • Deferred sales charges
  • Annual charges to pay for marketing and distribution costs for the fund
  • An expense ratio fund, which collects all the ongoing fees and expenses for the fund and its investors

Note that some mutual funds have hidden fees. Portfolio analyzer tools like Personal Fund can help you avoid these hidden fees and only pay what you need to.

How to Determine if a Mutual Fund is Right for You

Given their complexity, and the sheer number of stocks and assets some funds can contain, it’s a good idea to use a portfolio analyzer to determine whether one fund or another is a good investment. A portfolio analyzer may tell you:

  • Whether the fund is being managed smartly
  • If the fund has performed according to market projections or if it has underperformed
  • Whether the fund has any hidden fees
  • If the fund is aligned with your investment goals (i.e., retirement in the future, making as much money as possible now, etc.)

A portfolio analyzer is even more important if you are new to investing and want to avoid putting all of your money into a mutual fund that’s about to drop in value.

Getting Started Investing in Mutual Funds

You can begin investing in mutual funds by:

  • Making an investment account on a platform like Fidelity
  • Purchasing a share of a mutual fund. Note that most mutual funds have minimum investment amounts, but they allow you to purchase fractional shares. So if you don’t have enough for a single full share in a mutual fund, you can still buy into the fund by investing a flat dollar amount

Again, it’s a good idea to investigate a mutual fund before putting your money in it so you know what you’ll pay every year, what you can expect from its returns, and other critical information. 

Ultimately, investing in mutual funds could be just what your portfolio needs for long-term security and high financial returns. Be sure to use a portfolio analyzer tool like Personal Fund to make sure a given mutual fund is worth your time and money, however – otherwise, you might make a poor investment decision or invest in a mutual fund with hidden fees you didn’t anticipate previously.