How to Invest in Mutual Funds: A Beginner’s Guide
Investing in mutual funds is one of the easiest and most accessible ways for beginners to build a diversified investment portfolio. Mutual funds pool money from many investors to invest in a basket of stocks, bonds, or other securities. This provides investors with instant diversification across many different holdings. Here are 6 Ways to Invest in Mutual Funds:
- Lump Sum Investment
- Systematic Investment Plan (SIP)
- SIP with Top-Up Facility
- Transfer of Existing Investments
- Investing through Mutual Fund Distributors
- Investing Directly with the Mutual Fund Company
1. What are Mutual Funds?
A mutual fund is an investment vehicle made up of a pool of funds collected from many investors. This money is then invested by professional money managers in different securities like stocks, bonds, short-term debt, and other assets. There are 6 Ways to Invest in Mutual Funds such as lump sum investment, systematic investment plans (SIPs), SIPs with top-up facility, transferring existing investments, investing through mutual fund distributors, and investing directly with the mutual fund company.
Each investor owns shares of the mutual fund which represent a portion of the holdings of the fund and the income it generates. There are 6 Ways to Invest in Mutual Funds, allowing investors to choose the approach that best suits their investment goals and risk profile.
2. The key benefits of mutual funds include:
- Diversification: Instead of buying one stock or bond, you gain exposure to potentially hundreds of different securities in a single transaction.
- Professional Management: Mutual fund portfolios are actively managed by teams of investment professionals.
- Affordability: In many cases, you can start investing in mutual funds with a relatively low initial investment, sometimes as little as $500 or $1,000.
- Liquidity: You can easily sell your mutual fund shares at any time.
3. Types of Mutual Funds:
There are several different types of mutual funds to be aware of when exploring the 6 Ways to Invest in Mutual Funds:
- Stock/Equity Funds: Invest in stocks and can focus on a particular sector, investment style (growth vs value), or company size.
- Bond/Fixed-Income Funds: Invest in bonds issued by governments, municipalities, and corporations.
- Balanced Funds: Hold a mix of stocks and bonds in a single fund.
- Money Market Funds: Invest in very short-term fixed income investments and cash equivalents.
- Index Funds: Passively track a specific index like the S&P 500.
- Target Date Funds: Automatically rebalance to become more conservative as you approach a target retirement date.
4. How to Buy Mutual Funds:
There are 6 Ways to Invest in Mutual Funds, which can be broadly categorized into three main approaches:
1. Through a Full-Service Broker
You can buy and sell mutual funds by opening a brokerage account with a full-service broker like Fidelity, Vanguard, or Charles Schwab. These brokers often have their own families of proprietary mutual funds you can choose from as well as funds from other companies. Expect to pay an upfront sales charge on many broker-sold funds.
2. From a Mutual Fund Company Directly
You can open an account directly with a large mutual fund company and invest in their funds. This lets you avoid some of the fees charged by full-service brokers. Top mutual fund companies include Vanguard, Fidelity, T. Rowe Price, and PIMCO.
3. Through Your Retirement Account
Most 401(k), 403(b), and other employer-sponsored retirement plans offer a menu of mutual funds you can invest in through payroll deductions. Similarly, you can hold mutual funds in an IRA from a broker or fund company.
5. Understanding Mutual Fund Fees and Expenses:
Like any investment product, mutual funds charge fees and expenses which can take a significant bite out of your returns over time. When considering the 6 Ways to Invest in Mutual Funds, it’s important to understand the key fees involved, which include:
- Sales Charges/Loads: An upfront or back-end commission paid to a broker for selling the mutual fund, often 3% – 6%.
- Management Fees: Also called the expense ratio, an annual fee of around 0.5% to 1.5% to cover the costs of operating and managing the fund.
- 12b-1 Fees: An annual marketing/distribution fee of up to 1%.
Be sure to look for mutual funds with low costs or consider index funds which have very low fees. Small differences in fees can translate to a large impact on your returns over decades. When evaluating the 6 Ways to Invest in Mutual Funds, pay close attention to the expense ratios and other costs associated with each investment approach.
6. How Much to Invest in Mutual Funds:
One of the great advantages of mutual funds is their lower minimum investment requirements compared to directly buying stocks and bonds. This makes mutual funds accessible to investors with smaller amounts to invest initially. There are 6 Ways to Invest in Mutual Funds, catering to different investment amounts and preferences.
Different mutual funds and account types will have different minimums:
- Mutual Fund Minimums: Fund minimums are often $1,000 to $3,000 for an initial investment and lower for subsequent investments ($50 to $200).
- Retirement Account Minimums: Many 401(k)s and IRAs have low minimums per fund, sometimes as little as the minimum amount to open the account.
- Automatic Investment Plan Minimums: You may be able to set up automatic monthly investments with relatively low minimums like $50 or $100.
You can start small by taking advantage of these lower investment minimums and then add more money to your mutual fund investments over time. There are 6 Ways to Invest in Mutual Funds, including lump sum investments as well as systematic investment plans, which allow you to invest a fixed amount at regular intervals.
The Bottom Line: 6 Ways to Invest in Mutual Funds
Mutual funds are one of the best ways for beginner investors to easily gain access to a diversified portfolio that is professionally managed. By understanding mutual fund types, costs, account minimums, and the 6 Ways to Invest in Mutual Funds, you’ll be well on your way to building an investment portfolio with mutual funds.
