Investing always starts with a plan that affects things like your earnings, savings and debt. Once you’ve determined how much you want to invest, as well as your financial goals, you’ll come across several options for keeping your money. One of those options: mutual funds.
You can buy mutual funds directly from an investment firm or invest through your 401K. But often, the information packet you get when signing up for your 401K offers little to no guidance. And by the time you reach the list of mutual funds, your eyes are probably glazing over. While it may not sound exciting, once you educate yourself about investing, building your wealth can actually be exciting. Here’s how to get started.
What are mutual funds?
Mutual funds are pooled investments consisting of stocks, bonds, or a mixture of both, along with other investment securities that are managed by a professional investment manager. In other words, millions of investors pool their money to invest in a diversified portfolio. Since a money manager is selecting the investments for that fund, it allows you to invest at lower costs.
Between mid-2000 and mid-2022, assets held in mutual funds grew from $7.1 trillion to $22.2 trillion, according to the Investment Company Institute’s 2022 Research Report. The sheer number of participants in a mutual fund allows for greater purchasing power when it comes to buying stocks of companies that might be considered expensive to buy on your own.
Having an investment manager is predictable from individual stock selection, too. You can put your money in mutual funds and let the market work for you.
Mutual funds come in different classes, notably A-shares and C-shares, which come with different fees. But there are some mutual funds that are “no-load,” meaning there are no fees to buy and keep your money in the fund.
How can you make an investment?
You can buy mutual funds directly from investment companies. When you buy direct, there are no commissions or brokerage fees. However, your selection may be limited to only funds the company has invested in.
Want more options? You can also buy mutual funds from online discount brokers like Charles Schwab or Merrill Edge. This will give you access to a buffet of mutual funds that align with your investment objectives and make it easy to get started. Many of these types of brokers will waive fees and have no commission if you choose to open and maintain your account online.
How do they work?
Mutual funds collect money from investors and an investment manager decides which stocks, bonds or other securities to buy for the fund. Unfortunately, as an investor you have no say in the selection process – only in buying mutual funds. However, each fund has an investment objective—a distinct goal to maximize your investment. This investment objective gives you a preview of the strategy that the investment manager intends to use to maximize the fund’s returns.
When you buy a mutual fund, your purchase request is filled based on the fund’s daily share price at the end of the day, which means that the price you pay at the end of the trading day is determined when you buy.
Once your purchase request (or purchase order) is accepted and executed, it takes the trade date and two business days to finalize the sale.
When should I invest in mutual funds?
Dollar-cost averaging should be used when buying mutual funds, where you should consistently buy more shares when the market is down and fewer shares when the market is up.
The longer you are able to invest and make consistent contributions, the greater the potential for your investment to grow over time in mutual funds. Mutual funds perform well when the overall stock market is running high, but many mutual fund investors may invest during times when the market may be down.
Bottom Line: If you’re overwhelmed by the world of investing, mutual funds may be the way to join other investors to start your investing journey and find a diversified, convenient and low-cost way.