Mutual funds are a specific type of investment in which you pool your funds into an investment product along with many other investors. Then, to reach the fund’s investment goals, the mutual fund will focus on using those assets to invest in a group of assets (stocks etc). There are plenty of different mutual funds available so it can become hard to understand which one may be the best for you.
Investing can become extremely overwhelming at times which could, in turn, put you off completely or lead to you making the wrong choice when it comes to mutual funds. If you are a beginner when it comes to investing, it is always beneficial to research before making any big decisions. If you are interested in investing in real estate, Roofstock is a great place to start.
Identify Your Goals
Before you decide to invest, it is always a good idea to consider your goals and what they may look like. Identifying what they are can remove any future confusion or regret due to lack of knowledge. It is always good to think about what your goals may be (short and long-term), such as:
- Long-term capital gains
- College expenses
- Retirement fund
Because of the fact that over 8000 mutual funds exist right now, these goals can help you narrow down exactly which mutual fund may be right for you.
Risk Tolerance
When it comes to investing, risk tolerance is something that you absolutely must consider. Are dramatic swings something you can accept and handle, or would something more conservative be of more value to you? You must be able to accept the balance between the desire for returns and your risk tolerance. They are both necessary parts of investing.
Fees
Everyone needs to make money, that is understandable. The way mutual funds make their money is by charging fees to the investor, that is why it is so important to understand all the fees involved. There is a plethora of different types of fees when it comes to investing.
One type of fee is a sales fee, known as a ‘load’. This fee is either charged at the time of purchase or when the investment is sold. When you buy shares in the fund, a front-end load fee is paid from the initial investment. However, a back-end load is slightly different. It is applied when you sell your shares in the fund. To stop buying/selling too often, this charge is created to deter that.
3% to 6% of the total invested or distributed amount is typically charged when it comes to front-end load and back-end load fees, but it can by law also be as much as 8.5%.
Within mutual funds, these fees can either go to the broker, who is responsible for selling the mutual fund, or to the fund itself which can later on lower administration fees. There is also a third type of fee which is called a level-load fee. Unlike the others, a level-load fee is an amount that is charged annually and deducted from assets in the fund.
No-load funds may sound good at first because they do not charge a load fee, however, the other charges can be astronomical.
Different Types of Management
When it comes to different types of management, there are two prevalent ways. You must determine whether you want your funds passively or actively managed. When your fund is actively managed, a portfolio manager will make decisions such as which securities and assets will be included in the fund.
When your fund is passively managed, it aims to track and duplicate the performance of a benchmark index. These funds are also referred to as index funds. The fees involved are usually lower than the fees associated with actively managed funds.
Past Results
Perhaps something that may be overlooked a lot of the time, is the past results of the mutual fund. It is of the utmost importance that you research the past results of the mutual fund to gain an understanding of their track record. It is important to answer these questions:
- Were the fund managers results consistent?
- Were unusually high turnovers prevalent?
- Was the fund highly volatile compared to other major indexes?
The answers that these questions bring will be able to help you make a decision regarding your ideal mutual fund and which one may be the most beneficial to you and your investing journey.
There are plenty more things to consider when it comes to mutual funds, but the most important are greatly outlined in this blog. The Betterment Robo-advisor is a handy tool when it comes to mutual funds and investing. It is leading the industry being a low-cost and user-friendly Robo-advisor, and better yet, the management fees are just 0.25%.
