A Mutual fund, in simple words, are basically a common pool of money that you share with other investors. These investors contribute with their money as well, the total money will be invested in the investment objective of the mutual fund. The money is usually invested in stocks, gold, bonds, money market instruments, and so on. The best mutual funds usually have a long track record of good returns.
It is important to mention that mutual funds are directed and operated by professional money managers that have the resources and technology to analyze the market before making an investment decision. They target the fund’s assets and aim to produce income for the investors. Which means that each shareholder will participate in the gains and losses of the mutual fund.
Types of Mutual Funds
Mutuals funds are divided into different categories made for almost every type of investor. These are the ones that have the most popularity.
This type of fund invests mainly in stocks. This category is the largest among the others and is also divided into sub-categories. Sub-categories are named after the size of the company they want to invest in, for example, small-cap, mid-cap or large-cap.
While others are named according to their investment approaches. Such as income-oriented, aggressive growth and others. Equity funds are also categorized depending on whether they invest in domestic stocks or foreign stocks.
This type of fund represents the second most common type of mutual fund. A fixed-income fund. As the name suggests, These Funds target investments that pay a fixed amount of money in return. For example, government bonds and corporate bonds.
Index funds are a type of mutual fund whose holdings match a certain market index, for example, the S&P 500. Thanks to the passive investing strategy index funds have raised in popularity in the last few years.
While the other two categories invest in something specific, this particular type of mutual funds is a hybrid, they invest in money market instruments, stocks, bonds, and alternative investments. It can be considered as a combination of equity funds and fixed-income funds.
How to Invest in A Mutual Fund?
There are only 4 easy steps you need to follow in order to start investing in mutual funds.
1. Passive or active
Active funds are controlled by finance professionals who seek to out to beat the market, although this method has been proved to be difficult to do and maintain on a regular basis.
On the other hand, passive investing funds are much better as the funds are cheaper and there are fewer fees, their signature passive investment is the index fund which we previously talked about.
2. Decide your budget and research the best mutual funds for your portfolio
Calculate how much money you want to invest, think about how much money you need to start. That amount can vary from $500 to $3000 depending on the broker. Then decide on where you want to invest your money. Do your due diligence and research the funds you are thinking of investing in.
3. Where to buy mutual funds
Many investors choose to buy their mutual funds on online brokerages, which offers a vast variety of mutual funds and fund companies. For this, you will have to consider several aspects.
First, affordability, pay attention to the kinds of fees you might face, transaction fees, and sales loads. You might also want to consider the fund choices. The more the better, many brokers provide hundreds of no-transaction-fee funds to choose from.
4. Manage your portfolio
Once you know the funds you want to invest in, think about how you can manage your investments. As a tip, try to rebalance your portfolio at least once per quarter so it is in alignment with your goal or plan.
With mutual funds, you can earn money in three different ways.
- Earned income: from interest on bonds and dividends on stocks.
- Increase in the capital gain: the majority of funds pass this gain to their investors.
- Fund share price: if the price of a fund holding increases, then you will be able to sell your shares for a profit.