A mutual fund is like a baskets of investments; a single mutual fund can hold thousands of different stocks and bonds. For this and other reasons, mutual funds are the perfect way to begin investing. I hope you’ll read this post, but I’m nervous you may not. Why? Because the word “mutual fund” is in the headline.
I mean, really, even if you’re into investing, talking about mutual funds is about as exciting as watching a turtle cross the road.But, in recent reader polls, lots of people tell me they want more coverage on investing topics like understanding the basics and transitioning from just saving money to actually investing it. And in my opinion, mutual funds are one of the best ways to start investing even if you don’t know a lot about investing.Unfortunately, you do need to know a little bit about mutual funds to avoid putting your money into the wrong mutual fund.
Does that make sense? I’m kicking off a four-part series on mutual funds. Today I’ll provide a very basic overview on mutual funds for true beginners and how you can use them to start investing. Then we’ll sink our teeth into some stuff intermediate investors can use as well
Understanding What Mutual Funds Cost: How to Pick Winning Mutual Funds
What is a mutual fund? A mutual fund is a type of professionally managed investment that pools your money with other investors. The fund’s managers then use the pooled money to buy securities for the group. A mutual fund’s primary advantage is that it provides automatic diversification and should be less volatile.
(For example, if a mutual fund holds 100 stocks and one of those stocks becomes worthless, you only lose one percent of your money. If, by contrast, you only owned that single stock, you would’ve lost all of your money.)
For most individual investors, mutual funds provide the easiest way of maintaining the right mix of investments. To achieve the same thing on your own you need a lot of money to invest and lots of time to manage your investments. On the downside, mutual funds have costs that can eat into your investment returns. Sophisticated investors may also find that mutual funds offer less control over the timing of gains and distribution of income.
Types of mutual funds
Mutual funds provide an easy way to invest for any type of goal (short or long term) with almost any amount of money.The bad news is that choosing a mutual fund can be overwhelming. Morningstar, the leading source of mutual-fund research, tracks over 15,000 funds. How do you pick? First, you narrow the field.
There are many types of mutual funds: Open-end funds and closed-end funds. Actively managed funds and passive index funds. Stock funds, bond funds, REIT funds, commodity funds, and more. Target-date funds: Small-cap, mid-cap, and large-cap funds: Growth funds and value funds.
Head spinning yet? Take a deep breath. Here’s what you need to know. Open- vs. closed-end funds
Most funds you’ll be interested in are open-end mutual funds, meaning they will continue to issue shares as long as investors want to buy them.
Active vs. passive funds
Most mutual funds are actively managed, meaning a manager or a team of people monitor the fund performance and routinely adjust the fund’s mix of investments based on their research and experience in an attempt to beat the return of the overall market.
Related: ETFs or Mutual Funds?
By contrast, index mutual funds or passive funds simply hold a fixed ratio of investments to track the entire market or a portion of the market. The advantage to these funds is they have significantly lower fees.Target-date mutual funds.