Mutual Funds have been very common investment vehicles for years. If you plan on investing in mutual funds it’s important that you understand what they are and how to invest in them.
What is a Mutual Fund?
Mutual Funds are investment portfolios that can be made up of stocks, bonds, real estate, and/or other securities. These portfolios are funded by pooling money together that has been invested by many other investors, which range from hundreds to thousands of investors.
Diversification is made easy with Mutual Funds
Most mutual funds only require a minimum investment from investors to take part in the fund, from a couple hundred to a couple thousand dollars. This makes it much cheaper for investors to have a diversified portfolio compared to constructing their own portfolio.
Big Returns could mean Greater Risk
Before you go and invest in a fund, it’s important to look at the fund’s investments and determine how risky they are. In order to determine a funds risk, look for the biggest quarterly loss the fund has had to determine a worst case scenario hit you could take. Then take a glance at its beta, this will determine the funds volatility compared to the S&P 500. Next, check out the fund’s standard deviation to determine how much its returns varies around its average returns.
Take Expenses into Consideration
Mutual funds generally charge a percentage of total assets in order to make a profit. These expenses may not seem like much in the short-term but over time those expenses can really eat into your long-term return on investment.
Take Taxes into Consideration
Before investing in a mutual funds, consider how often the fund buys and sells within the fund. Anytime a fund has dividend paying stocks or sells a stock for a large profit, fund shareholders will have to pay taxes on those gains. To avoid paying a lot in taxes, look for funds that have a low volume of trading.
Consider Index Funds
Index funds should be a part of your portfolio. When you own an index fund you essentially own an entire portion of the market. Also, Index funds have low expenses and can be tax efficient, which will boost you gains in the long-run.