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 Investing in mutual funds is pretty simple, even easier than investing in common stocks. That's because when you own a share of a mutual fund, you are really buying a share of a portfolio that the mutual fund manager picks for you.
Mutual Fund Managers
The role of the fund manager - really a team of managers - is to follow each stock and / or bond in the portfolio and make a decision whether to sell or purchase additional shares or securities. For example, in an actively managed mutual fund, the management team looks for stock price patterns and tries to take advantage of unusual patterns, or inefficiencies, in the market to make money. In a passively managed mutual fund, the team will trade less frequently.
This is important to understand because many actively-managed funds will have relatively high management fees. Remember, even though you are only investing in a mutual fund, the team is buying shares of stock and the more they trade, the higher the level of brokerage fees required to handle these transactions.
If you look in the newspaper or online, you can find the mutual fund's price, usually quoted as the Net Asset Value or NAV. Unlike stock prices that fluctuate during the day's trading hours, a mutual fund's NAV is calculated shortly after the close of the stock exchanges - usually some time after 4:00 p.m. EST.
Investing in Funds
Investing in a mutual fund is pretty easy since you can start out with a relatively small investment - anywhere from $500 to $2,500. You can even invest in a mutual fund over time through payroll deductions or electronic withdrawals from a banking account. Once you've invested in a mutual fund, most funds allow you to purchase additional shares with as little as $250 to $500.
All you need to get going, besides the start up money, is to fill out an application that sets up an account with a brokerage or investment company. There are lots of big companies in the marketplace like Fidelity Investments, Scottrade, Ameritrade, E*Trade, and TD Waterhouse. Applying is easy so you can be investing in a mutual fund in no time.
Mutual Fund Research
We've written several articles that can help you with your mutual fund research. Take a look at our articles on topics such as:
- Buying Mutual Funds - a four part series that walks you through the process of evaluating and picking mutual funds.
- Mutual Fund Ratings - provides a detailed explanation of what to expect when looking at mutual fund ratings.
- Mutual Fund Loads - helps you to understand the types of fees mutual funds can require and how those load can eat into the investor's return on investment.
- Exchange Traded Funds - explains the difference between a mutual fund and what is called an exchange traded fund or ETF.
- No Load Mutual Fund - another article aimed at explaining how mutual fund loads can hurt the investor's return - especially in the short term.
Comparing Mutual Funds
Finally, there are some things you need to be aware of before investing in a mutual fund:
- Compare the fund fees before buying, not all mutual funds are managed the same way and fees will eat into your returns.
- Look at the history of the mutual fund, how long has the company been in business and how big is the fund?
- Carefully consider the fund's volatility and risk. Understand what you are investing in so that you understand the risk you are taking. If the returns were high in the past, that does not mean they will be high in the future.
Mutual fund investing is a great way to ease into investing in stocks. However, that fact does not relieve you from doing your homework before investing your hard earned money.
Buying Mutual Funds
If you're new to investing and think that mutual funds are the easy way to get started in the stock market, then you've got the story half right. While investing in a mutual fund requires a lot less research, that doesn't mean you don't have to do your homework.
Our final suggestion is that you become an educated consumer of mutual funds. And to do so, you should be familiar with the terms, fees, as well as various ways to evaluate mutual funds. Fortunately, we can help there too with our "buying mutual funds" series:
About the Author - Investing in Mutual Funds
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