How To Invest Mutual Funds
It might seem difficult to learn how to invest in mutual funds, but mutual funds can be a great investment tool that allows investors to easily diversify their portfolio. By purchasing a mutual fund you are buying into an account that is purchasing multiple stocks, bonds and other investment options that meet the goals of the mutual fund. Mutual fund goals can be growth, income, balanced accounts and many other investment objectives. Mutual funds are not guaranteed by the FDIC and can lose value.
- Learn your risk tolerance. Risk tolerance is basically how willing you are to take the risk of losing value in your investment for a potentially higher gain. Times of high and constant growth make everyone think they have high risk tolerance, but during times of market fluctuations when investors start to see their portfolios value go down they learn their true risk tolerance. The goal is to learn your risk tolerance early on so you don't commit the ultimate investor crime of buying high and selling low.
- Determine your investment goals. Every mutual fund has different investment goals. Some funds have a goal of growth, and so they purchase more small business and start-up stocks with the hope that these have the best opportunity to grow. Some funds have an income goal, and purchase more established stocks that have a history of paying dividends. Other funds have a balanced goal and purchase a variety of stocks, bonds and money market accounts to be well diversified. And some funds have a goal of retirement by a certain year, and change their portfolios to be more aggressive early on and get more conservative as you get closer to the retirement year.
- Research the mutual funds or seek an investment advisor. Once you know your risk tolerance and what your investment goals are you can begin to research different mutual funds. You can research the funds online, in investment magazines and newspapers and through investment advisors. Investment advisors can be a great help.
- Review the prospectus. Once you have found a few mutual funds that look promising you should ask to review the prospectus. Every mutual fund must have and give you a prospectus. This outlines the funds goals, what they invest in, fees and past results. Review the investment goals and fees closely. Every mutual fund has fees. Even if they are no-load mutual funds they still have service fees, redemption fees and other expenses. Review the past performance and how the funds have performed against similar fund groups to get an indication of how well managed the fund is. The prospectus can be intimidating by the size but it is very helpful and important to review.
- Purchase funds online or through a financial advisor. There are many options for how to purchase mutual funds. You can purchase directly from the fund itself, you can purchase funds online or you can purchase through a financial advisor. Determine your personal acumen to investing and wether you are comfortable investing alone or if you can benefit from the guidance from a professional.