Investing in mutual funds is a great way for investors to establish a diversified portfolio, and that too without incurring a lot of extra cost and time. Or, we can say that mutual funds allow investors to invest in different assets with just one investment.
This type of investment is mostly considered by long-term investors, or those working to build their retirement corpus. So, if you are also planning a long-term investment, then mutual funds should be among your top picks.
Mutual funds work on the concept of pooling money from a large number of investors. The fund houses collect money from a large number of investors, and then invests it in a different type of securities, including stocks, bonds, and more. The fund house selects the securities as per their investment objective.
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Now that you have got some idea of how mutual funds work and why you need to invest in them, let’s discuss how to invest in mutual funds.
How To Invest In Mutual Funds?
Investing in mutual funds is no rocket science. In fact, it is pretty easy, but still you must know a few basic things that will assist you in investing in mutual funds. These are:
Why You Want To Invest In Mutual Funds?
It is very important to be clear on the financial goals that you want to achieve by investing in mutual funds. Your financial goals play a crucial role in selecting the type of mutual funds that you should invest in.
For instance, if you have a long-term goal, such as retirement, or a child’s college education, then stock mutual funds must be on your list. This is because you would have a lot of time to wither the ups and downs of the market. The market is always expected to move up in the long-run.
On the other hand, if you are saving for a short-term goal, such as buying a home or a car few years down the line, then bond mutual funds are a better option. Such funds offer more protection, but the return is relatively smaller.
Similarly, if you are saving for mid-term goals, i.e. within five to 10 years away, then you could go for balanced mutual funds, which invests in both bonds and stocks.
Decide Your Budget?
Most mutual funds have a minimum investment requirement that ranges from $500 to $3,000. Some mutual funds are in the $100 range, while some have $0 minimum investment requirement. So, once you set aside the minimum investment, you need to ask yourself how much more money you can comfortably invest in mutual funds.
Understand Mutual Funds
Before you start to invest in mutual funds, it is very important to know what mutual funds are, including the cost of owning them, their pros, cons, how they work, etc. Mutual funds typically charge an annual fee towards fund management expenses. You must be clear on the fees as it would impact your actual return.
Investors must also have an understanding of different mutual fund structures. For instance, open-end funds have no limit to the number of investors or shares, while closed-end funds have a limited number of shares.
Research Potential Mutual Funds
Now that you have your investment goal, budget and understanding of mutual funds, you are ready to research the potential mutual funds that you could invest in. The best way to research potential mutual funds is to study their past performance, and compare their past performance with the benchmark indices and other similar funds.
Also, you need to consider the expense ratios of the mutual funds before selecting one. As said above, a high expense ratio can drastically reduce your actual return. You should also take into account load fees, as well as the credibility of the fund manager, when researching potential mutual funds.
Final Words
You are now ready to invest in mutual funds. All you need to do now is open an investment account and invest in the mutual fund (or funds) that you have researched.
You must, however, never forget that investing is not a one-off thing. Rather, you need to regularly monitor and rebalance your portfolio. You should make a habit of rebalancing your portfolio at least once a year to ensure you’re on track to meet your financial goals.
