Mutual funds are companies that combine investors’ money in an effort to diversify their assets throughout specific areas of the market. So investing in a mutual fund is more than just buying into the investments a fund makes. You’re actually buying shares of the mutual fund to become a part owner. This typically attracts lots of attention, especially from long-term investors. Here’s a guide for how you can get your hands on a mutual fund.
How to Buy Mutual Funds
Maintaining your own account at a brokerage company is a great way to hand-select which mutual funds meet your goals the best. In an effort to educate you as much as possible, brokerages often implement mutual fund research tools to help you dig into the performance of a particular investment. Furthermore, you may see lists of the top mutual funds at a firm sorted by performance, investment type or other factors.
The brokerage fees associated with investing in mutual funds vary, as do the internal fees of the funds themselves. In other words, be sure to check the prospectuses and fee schedules of each mutual fund and brokerage you look into, respectively.
Because of their pre-diversified nature, it’s common to see financial advisors utilize mutual funds in their clients’ investment portfolios. This could be an especially worthwhile route for investors that might be apprehensive about making investment decisions all by themselves. In order to best determine which funds can help you attain your ultimate financial goals, your advisor will work with you to figure out your risk tolerance, time horizon and liquidity needs.
In most cases, robo-advisors offer investment advisory services at a fraction of the cost that a fully-managed portfolio does. Robo-advisors take your risk tolerance and desired return levels and turn it into a portfolio of investments. Index funds and other types of mutual funds are extremely popular with robo-advisors, as they make diversification much simpler. Some robos will even allow you to dictate which investments you’d prefer to stick to. That gives you control in a mostly automated scenario.
Types of Mutual Funds
Thinking about including mutual funds in your investment portfolio? Well, mutual funds are themselves portfolios — only they’re built by a company that chooses how it will diversify the pooled funds of investors. For the most part, mutual fund companies stick to one type of investment strategy within their purchases. Some examples of these philosophies include ones centered around indexes, equities and fixed income securities. Below, you’ll find some of the most popular mutual fund options on the market today.
An index fund tracks the performance of a market index, such as the S&P 500, the Russell 2000 and others. These indices are made up of a wide range of specific investments, most notably stocks. So if you invest in an index fund, your money will passively follow the performance of the index. This is as opposed to an actively managed fund in which a portfolio manager regularly buys and sells investments that are consistent with the fund’s overarching ideology.
Money Market Funds
Money market funds focus strictly on low-risk cash and cash-equivalent securities. This helps these mutual funds maintain a high level of liquidity that make them easy to buy and sell. At their core, these funds shoot to hold their net asset value (NAV) at $1/share. In turn, money market funds have become a favorite for investors, as any earnings that push the fund beyond the above $1 mark are paid to investors as dividends.
As their name states, bond funds are mutual funds that invest solely in a type of bond. These include municipal bonds, corporate bonds, international bonds, high-yield bonds and Treasury inflation-protected securities (TIPS). Buying bonds on an individual basis can be pricey, so these funds offer a cheaper way to pool your money together to invest in many different bonds at once. Interest payments are typically made to investors on a monthly basis.