Why Investing in Mutual Funds is a Smart Move
Mutual funds, also known as mutual fund investing, are one of the easiest ways to invest in the stock market without taking on all of the financial risk yourself. Mutual funds work like this: A group of people pool their money together and invest it with a professional fund manager who picks individual stocks or bonds to invest in on behalf of the investors. This way, you benefit from an expert’s research and decision-making capabilities without having to do all the research yourself. If you’re interested in mutual funds investing, consider these reasons why it makes sense to consider mutual funds as an investment option now!
What are Mutual Funds?
There are two primary types of funds: those that are actively managed by a human, and those that track an index. They can be set up as open-ended funds, where investors can contribute or withdraw money at any time (these are called mutual funds); closed-end funds issue shares which trade on an exchange like stocks and generally don’t allow further investment. All funds charge fees to pay for their expenses—and they vary widely, so it’s important to pick carefully. If you’re investing your 401(k) with your employer, you don’t have many choices about what you invest in; but if you’re choosing your own mix of investments for retirement, pay attention to total annual costs.
The Advantages of Mutual Fund Investing
The benefits of mutual fund investing are numerous. These include having instant diversification, being able to choose from thousands of investments and no longer having to worry about keeping track of individual positions or even dividends. Mutual funds also offer some tax advantages and can provide more liquidity than other investments like real estate or buying stocks on margin. If you’re considering investing for your retirement but don’t have time to learn about stocks, bonds, REITs and mutual funds individually, then investing in a broad index fund might be right for you. This guide will walk you through why mutual funds are such a smart move when it comes to your long-term financial health.
One common misconception about mutual funds is that they only contain high risk, high return investments. While that used to be true back in days past, today there are low-risk options within most types of asset classes like equities (stocks), fixed income (bonds) and commodities (gold). Whether you prefer an aggressive investment strategy with higher returns or something more conservative so as not to lose money, there’s likely a mutual fund out there that aligns with your goals and objectives.
In fact, many investors feel so confident investing their money with certain mutual funds due to low management fees—which helps build their overall wealth over time—that they purchase their first shares well before their retirement date arrives!
How to Choose an Investment Firm
When you’re ready to invest, it’s time to choose an investment firm. There are many to choose from, so what do you look for? If possible, pick a company that has been around for more than five years and that offers a wide range of mutual funds. In fact, make sure they specialize in investments because otherwise they could have conflicts of interest when recommending certain funds over others. An important part of choosing an investment firm is making sure it’s right for your needs: What if your portfolio grows quickly and you need to move large sums of money within just one or two days? Be wary of potential issues like these and make sure you know how they handle such situations before handing over your hard-earned cash.
Understanding the Risks
While stocks tend to move independently of one another, mutual funds hold dozens, or even hundreds, of stocks at once. As a result, mutual funds are inherently more risky than individual stocks. Before you invest any money in an investment vehicle—particularly if it’s your entire retirement savings—you should be aware of its level of risk and how those risks are measured. An important term to keep in mind is beta coefficient, which describes how much a stock (or fund) will typically move when compared to market fluctuations as a whole. If your mutual fund has a beta coefficient of 1.0 (which means it moves with the market), that’s considered low risk—and therefore desirable for most investors.
Building Wealth with Diversification
While you’re saving for retirement, it’s important to get your money working as hard as possible. One way to do that is through mutual funds, which can offer a diversified portfolio at an affordable price. The one drawback? Because these funds typically invest in stocks, bonds and other assets all at once, they’re not appropriate for everyone. If you want an investment that provides just as much growth potential but with less risk (for example, if you’re nearing retirement), consider adding some real estate or small business investments to your portfolio.
A Personal Money Example
As previously mentioned, mutual funds allow investors to purchase shares of a wide variety of investments. With just one investment, you can diversify your portfolio by gaining exposure to stocks, bonds and alternative investments that you otherwise wouldn’t be able to invest in on your own. For example, if you invested $10,000 into a stock mutual fund with an average annual return of 8%, over 20 years your initial investment would grow to $33,814. If instead you invested $10,000 into 10 different stocks at an average annual return of 8%, over 20 years your initial investment would grow to only $15,247—less than half as much as investing in a single mutual fund!