So you want to invest in mutual funds and don’t know where or how to start? It can now be easy for you since you most likely have money saved up in your IRA already. An IRA investment can go beyond bonds and stocks. Although it is best to talk to a financial expert regarding the appropriate mutual funds to invest on, this list should set you off to a good start. Get a pen and paper and you may start taking a list of questions on mutual fund investments with the tips below.
How to Invest in Mutual Funds | 5 Tips for a Good Start
1. Define Your Goals
Your goals will be the anchor of every decision you make in your investments. Knowing how fast you want your money to accumulate and for what purpose also helps you decide which type of mutual fund to invest in. Your goals affect your investing approach — aggressive, moderate or conservative. This also defines your risk tolerance, the amount of risk you’re willing to take to gain income.
Although you might have immediate, short-term plans, it is important to always consider the bigger picture of your financial plan. At what age do you consider retiring? What kind of lifestyle do you want to have? You should be considering these questions in your planning.
2. Look at Your Options
In a broader sense, a mutual fund is a sum of money consolidated from different individual investors, companies, and other entities. This sum of money is then invested by a fund manager, who operates with a specific goal in mind. That goal also defines the different types of mutual funds you can choose from such as money market funds, exchange-traded funds (ETFs), a balanced fund, and index funds. Other types also include an equity fund, bond funds, income funds, specialty funds, and global/international funds.
In balanced funds, for example, they provide a balanced combination of safety, income appreciation, and capital gains. You may look into investing in an asset allocation fund which is similar to balanced funds. The only difference is that these funds don’t contain a specific asset class percentage.
3. Invest in Familiar Industries/Sectors
If you have zero knowledge of real estate, it doesn’t make sense to invest in real estate mutual funds. The better route to take is to invest in mutual funds concerning industries you are very much familiar with. That way, you have an idea of how the market works informing you better in your investment decisions.
4. Conduct Due Diligence
Although IRA providers assess the selection of mutual funds they offer, it’s also helpful to conduct your own research of the mutual funds you’re eyeing to invest in. One important thing to check is the Securities and Exchange Commission required legal document, mutual fund prospectus. The SEC mandates mutual funds to make this document available to would-be investors.
A mutual fund prospectus contains data on the management history of the fund, its performance and historical expenses, and a lot of other valuable information. You can also do an online search of a mutual fund’s prospectus. Type mutual-fund-name prospectus.
5. “Placing Your Order” via Online Tools
As to how you can purchase a mutual fund, it is now easier with the aid of technology. You can buy a mutual fund on an IRA custodian‘s website. You may also call your custodial and tell him/her what fund you want to invest in and how much.
6. Know All Mutual Funds Schemes
There are several schemes offered by mutual funds companies. These include funds under the income category, equity category, and hybrid funds. The funds under the income category are debt instruments. The government, private, and public companies also release these. Some examples are bond funds, fixed-maturity plans, and liquid funds. For the equity category, these are investments in company shares. An example is tax saving mutual funds. The hybrid funds, meanwhile, are a mix of both.
7. Familiarize with the Advantages and Disadvantages
One of the advantages of investing in mutual funds is the liquidity on a daily basis. For the open-end funds and investment trusts’ shareholders, they can sell the holdings to the fund through intervals on a regular basis. It is equal to the fund’s holdings’ of the asset’s net value. Another advantage is the professional management of the investment. Portfolio managers supervise open-end and closed-end funds.
The disadvantages include fees, income predictability is lower, and fewer opportunities to customize. Another disadvantage is that there is also lesser control when it comes to the timing of recognized profits.
When you plan to invest in mutual funds, this requires a clear view of one’s goals to set a direction and trajectory. It is also important that you make good use of all mutual fund schemes to your advantage. You also have higher chances of meeting your financial goals given the right choice of investment objectives. Having a mutual funds investment can also diversify your portfolio in order to maximize the returns.
Do you have other tips on how to invest in mutual funds? Share it with us in the comments section below!