Would learning the simple basics of mutual funds help you better understand how investing works?
The overall picture painted by the media regarding the stock market lead many to believe investing is a complicated craft.
All that stress and potential money loss is just too much for the regular Joe to handle!
Contrary to popular belief though, investing isn’t all that scary! In fact, there are several ways you can invest your money, starting as small as you’d like.
THE SIMPLE BASICS OF MUTUAL FUNDS
What are mutual funds?
A mutual fund is a pretty standard investment vehicle.
The way it works is: people (individual investors, organizations, companies) pool their money together, which is later invested in a variety of stocks, bonds and other types of securities.
Mutual funds are among the least stressful ways to invest and can provide a steady growth of investors’ wealth.
How do mutual funds work?
The money pulled together by investors are used to buy a variety of securities. But who exactly is responsible for these decisions?
Mutual funds are handled by a professional manager.
Each investor has certain goals they would like to meet, and it’s the money manager’s job to invest the money accordingly.
The great advantage of having someone handle your investments, is you don’t have to stress out about which stocks to buy or how to handle your securities!
Your portfolio will be professionally managed, so you can sit back and relax while enjoying your dividends and the diversity of your investments.
By the way, your earnings are subject to tax. However, should you choose to top off your retirement savings, you can benefit from tax free investment income!
The bad news though, is a professional portfolio manages costs money.
While their expertise is certainly appreciated, it doesn’t come cheap. Management costs and additional fees can quickly add up.
What are the costs associated with mutual funds?
Most funds range between $1,000 – $5,000 as a minimum initial investment.
However, there are plenty of mutual funds you can start investing in with as little as $50. Sometimes even less.
You can start investing either by buying them as you would buy stocks, through your brokerage account, or simply give your broker a call and inform them of your intentions. They’ll know how to guide you from there on.
Alternatively, you can buy your securities directly from Mutual Fund Companies. By registering with them, you can start investing in more specific mutual funds or funds that are part of a larger family.
Aside from the costs of your initial investments, you’ll be asked to pay commissions or fees required to buy certain shares.
The costs associated with buying or selling mutual funds are called sales loads.
The most common sales load types include front end loads (or sales charge), back end loads (deferred sales charge) or no load mutual funds.
Front end loads are deducted from the initial investment amount and, implicitly, reduce the size of your investment.
Back end loads, on the other hand, are fees investors have to pay when they sell their shares. This translates into a decrease in the share’s value.
No load funds imply no commissions or fees when the mutual funds are are sold. This, of course, occurs only when shares are sold directly by the company, without intermediaries.
Clearly, the most convenient mutual funds to buy are those that don’t imply sales loads! If you start learning about investing, you might one day be ready to handle your own portfolio and avoid hefty, unnecessary fees.
Other costs associated with mutual funds include management or account fees. Typically, these are charged periodically and are paid to the professional adviser responsible with portfolio management.
In a nutshell, the combined costs associated with mutual funds can be overwhelming. Before investing in mutual funds, make sure all fees and commissions are worth it!
Is it worth investing in mutual funds?
The mutual funds market represents a varied form of investment. It’s no secret, this is a very expensive way to invest! But sometimes choosing the right mutual funds could be worth it.
In simple terms, there are a few basic types of mutual funds: equity funds (that invest in stocks), fixed-income funds (that invest in bonds), balanced funds (that invest in both stocks and bonds), money market funds (lower risk investments, but with lower returns).
Other types of mutual funds exist and have, more or less, the characteristics of these basic types combined.
With that being said, deciding whether or not investing in mutual funds is worth it deserves a serious in depth analysis.
Are you looking to generate an alternative to your retirement plan? Your goals should focus on long term investments. Equity mutual funds should be the ones to concentrate on.
Are you looking to reach a financial goal over the next few years? Look for the best mutual funds for short or medium term goals. In which case, bond and balanced funds should be your main focus.
If you manage to pick the mutual funds with the lowest fees that best match your goals, investing in mutual funds could be a good idea. Otherwise, you might be better off looking for alternatives.
The most important factor to consider is finding the right type of fund to match your investment goals.
Before deciding, make sure to consult with a financial advisor.
Have you ever invested in mutual funds? Was is worth it or do you regret your decision?
