There are many ways to plan for your financial future. When I say future, I mean both long term and short term. Saving money has an immediate effect on your bottom line. Investing in places like the stock market are longer term investments. One vehicle for investing is the mutual fund. So, what is a mutual fund and why would you want to invest in it?
Mutual funds are investments that are relatively easy to make. After all, unlike investing in single stocks, mutual funds allow you to diversify your holdings while not having to do the heavy lifting yourself.
Mutual funds are managed by the mutual fund manager. They are responsible for the investments made with the investors’ money. This is why you need to do your homework on the various funds available.
Here are a few tips on how to invest wisely in a mutual fund. First off, is the fund open to new investors? Quite a few times, I’ve heard of a fund that was very popular only to find out that it was closed to new investors. What good will it do to research a fund that won’t accept you as an investor? Anyway, once you determine that the fund is open to new investors, look to see what the minimum investment is. Some funds start at a $5,000 initial investment. That’s a bit steep for the average investor. Also keep your eye on the minimum amount for subsequent investments. If you must invest in $1,000 increments, then the fund may or may not be for you.
Does the fund have any fees and do they take them upfront? Some funds may charge a commission upfront. That means you are at a negative balance from day one. What I mean is if the fund charges 5% upfront, then you only are investing 95% of your money. So if the fund makes less than 5% that year, you will be at a loss for the first year. Many funds are no-load funds. That means they don’t charge administrative fees or upfront commissions. Your money will grow much slower if the fund managers charge several percentage points in interest.
Another thing to look at is the fund’s financial objectives. Is the fund aggressive and likely to take more risks then you are comfortable with? Is the fund too conservative and not focused enough on growth for your taste? These issues are important. Reading the prospectus of each fund provides you with many answers. There are also sites that are devoted to mutual funds ratings and are useful comparison tools.
Look at the fund’s current holdings. Do you see any holdings that you take issue with? Maybe you’re an animal rights activist and don’t want to invest in certain companies. Maybe you don’t want to invest in companies that are involved in energy production or mining or other activities. Read the list of holdings to make sure you don’t invest in a fund that puts you in an ethical quandary.
Investing in mutual funds is a worthy part of any investor’s activities. It takes a load off you and places it on the head of a trained professional who is working for you. Always invest wisely and make informed decisions. Do your homework before investing a single penny.