Investing in mutual funds can be daunting to say the least if you aren't familiar with the basics. Thankfully, it's actually quite simple to do. You don't need to be an expert, it doesn't take much time and it's easy to understand. Here's how to invest in mutual funds in just a few steps.
5 Steps To Invest In Mutual Funds
The five steps below will walk you through how to invest in mutual funds keeping your investment goals at the heart of your plans. There is no one size fits all, but these steps will help you create a custom plan of action to invest in mutual funds within minutes.
1. Start With Your Investment Objective
Everything should start with your overall investment goals. If you don't know where you want to be in one, three, five or even 10 years from now when it comes to investing, then you won't know how to invest your money.
First you need to define your goals. An example might be to “save $10,000 for education two years from now” or it might be as simple as “save $100,000 for retirement in 7 years.”
After setting your goals, you'll want to consider the different types of mutual funds to look for with objectives that align with your goals. We'll discuss the different types of mutual funds below.
2. Choose An Investing Style
Mutual funds have fund managers that oversee the investments within the fund. There are two types of management which are active managers and passive managers.
A mutual fund that is actively managed means the fund managers are constantly tracking the investments and adjusting them accordingly in efforts of reaching the goal of the stated fund objective.
If the fund objective is simply “growth” then the managers will update the fund actively to include the companies that they believe will best achieve high growth.
A mutual fund that is passively managed is a fund whose investments are not picked by fund managers, but rather automatically track the investments found within a particular market sector or a certain index such as the S&P 500.
Not sure what an index is? Consider reading “What Is An Index Fund?“
The fund investments update automatically as the tracked index updates. Passively managed mutual funds usually have lower fees due to not having to pay for a fund manager to actively manage and update the fund.
3. Select The Mutual Funds To Invest In
Now that you know your investment goals and objectives, and the two main styles of management within mutual funds, now you need to select the funds you wish to invest in.
If you've decided to invest in passively managed mutual funds such as an S&P 500 Index Mutual Fund, then it simply comes down to picking the company that offers this fund. I'd consider looking at Vanguard, BlackRock, or SPDR.
If you wish to invest in actively managed mutual funds, then you might be overwhelmed with the thousands of funds to choose from. Don't let this scare you, they are just different companies offering similar products.
When shopping for a couch, you'll likely have a large selection to choose from, many of which with similar designs and materials. So it is with mutual funds.
Consider looking at the following characteristics of the mutual fund before selecting it to invest in.
Type of Fund
There are different fund types with different objectives. Most funds will fall within one of the following categories:
- Growth: A growth fund focuses on investing in companies who have the highest opportunity for growth.
- Value: Value funds seek to invest in companies whose prices appear to be lower than their real market value.
- Blend: Blend funds focus on a mix of both growth and value funds.
- Income: Income funds focus on investments that provide steady streams of income such as dividend stocks or bonds.
Most people invest in mutual funds to get the best return with the lowest amount of risk, and a popular fund type tends to be a blend fund or growth and income fund.
Fund Objective / Overview
The important thing to look for when selecting a mutual fund to invest in is making sure the fund objective aligns with your investment goals. The fund objective is found within the page that explains the fund's investments, returns, and strategies.
Here is an example of the fund overview and objective for the Fidelity Zero Total Market Index Fund (ticker symbol FZROX):
Although past returns are no guarantees of future performance, it is often one of the most useful ways to get a feel for how the fund performs in the long run. Consider looking at the fund returns for at least the last 5 to 10 years.
4. Compare Mutual Fund Fees
After gathering a handful of funds that align with your goals, risk tolerance, and have a track record of success, it all comes down to comparing the fees. Fees can eat away at your returns over the long run and should be carefully considered.
When reviewing a fund, the fees will be stated on the fund's main web page under the heading “expense ratio.” It is stated as a percent of your total investment charged annually.
Obviously, the fund with the lowest fees is ideal. Index mutual funds, or passively managed mutual funds, will always have the lowest fees due to the nature of how the fund is managed.
5. Diversify Your Portfolio
Mutual funds are diversified by nature, but it's not a bad idea to consider investing in a few mutual funds that target different objectives, company sizes and different markets.
One might consider having a total market index fund, a growth stock mutual fund and an international market fund to their portfolio, for example.
Should I Invest In Mutual Funds?
Should you buy mutual funds? Mutual funds are great investment options if you prefer to have a professional manage your portfolio with a stated investment objective.
However, if your strategy is to invest in an index fund or just to lower your investment fees in general, I would highly recommend considering an Exchange Traded Fund (ETF) instead.
You Might Also Like: What's The Difference Between An ETF And A Mutual Fund?
Why? Because their fees are WAY cheaper and they are much simpler by nature, while achieving the same goal as an index mutual fund.