How to Invest in Mutual Funds
“Mutual funds’ investments are subject to market risks. Please read the offer document carefully before investing”, We are well-known disclaimers for all mutual fund advertisements. Depending on the type of fund, the risk factor also varies. Investments that are prone to wild fluctuations are considered highly risky. For example – Equity funds are considered more unpredictable, especially during the medium term. Debt funds also carry risks but are generally considered safer than equity funds.
Decide whether you want to go active or passive
As a mutual fund investor, the biggest decision you will have to make is whether you feel that active management is worth the extra price you pay. Unfortunately, a large proportion of actively managed mutual funds end up undermining the major stock market benchmarks, reversing them to spend more money to invest. However, a handful of fund managers have been able to consistently outperform for a long time. If you are convinced that those track records are valid – and they will continue – then it makes sense to actively invest some of your money to try to capture the predictions of better fund managers.
Regardless of which type of mutual fund you choose, it always pays to reduce costs. First and foremost, make sure that you do not pay an up-front sales load on a mutual fund purchase, as doing so receives a percentage of your initial investment in your broker’s wallet. Equally important but often overlooked is the impact of higher annual expenses. Paying more than 1% for an active fund makes it very difficult for a fund to even exceed its benchmark performance, let alone surpass it on a consistent basis. With index funds offering expense ratios of less than 0.1%, you do not need to pay too much for mutual funds.
Building a portfolio of mutual funds
The right way to invest is to build a mutual fund portfolio. A portfolio is a collection of mutual funds that helps you meet your investment goals. Your total return on your overall portfolio matters, not a fund. In this section, we learn the basics of building a mutual fund portfolio.
Find a family
With mutual funds, the cheapest way to set up accounts is directly with the fund company that offers the shares. So, if you can find a company that offers a family of funds that you like, it makes things a lot easier, because you can make a single deposit that is split into different funds on a regular basis goes. This is not to say that you must live with a family, and many investors feel more comfortable diversifying by fund provider. However, people who find certain fund families that give them exposure want their tracking to be easier, as it is with many fund families to deal with over time.