How to Invest in Mutual Funds

Опубликовал Admin
25-09-2016, 03:10
1 428
Regardless of the size or goals of your investment portfolio, adding mutual fund holdings can help you diversify your investments while maintaining a low cost structure and a focused investment target. Investors of all sizes and skill levels can benefit from learning how to invest in mutual funds.


  1. Select the financial institution you plan to use for purchasing mutual funds by carefully researching and asking for referrals from friends and family who regularly invest their money in the market.
    • Online investment firms typically have competitive fee structures and varied fund selections for investors willing to take a do-it-yourself approach to investing in mutual funds. This will require you to complete your own research and carefully monitor the performance and allocation of your mutual fund holdings. Many online investment management firms have helpful tools and guidance sections for beginning investors.
    • If you have a more sizable portfolio, you may prefer to have the guidance of a professional. Payments to fee-only financial advisors typically are in the form of an hourly or retainer basis or a percentage of assets managed. Choosing this option will alleviate the burden of self-selecting and monitoring each of the mutual funds in your various accounts.
    • Banks and credit unions sometimes offer access to mutual funds. However, they may charge higher fees and/or commissions than fee-only advisers, while providing a rather limited selection of mutual funds. Some banks will provide access only to one particular company of funds.
  2. Determine your risk tolerance. How much risk and uncertainty are you willing to accept in your investments? A higher risk level is generally accompanied by a higher potential for financial gains.
    • Mutual funds will range in risk level from very conservative to highly risky. You should develop a diversified basket of mutual funds which meets your preferred level of risk. Visit financial websites (such as Lipper or Morningstar) where you can find risk assessments for each mutual fund.
    • Even if you are a conservative investor, you may want to add at least one or two riskier mutual funds to ensure that your overall portfolio will be able to experience some growth rather than mere preservation of capital. Refrain, however, from putting all of your funds into risky investments. Reserve at least a small portion (perhaps five percent) in cash to take advantage of opportunities as they arise.
  3. Practice overall diversification. This is essential for performance success. By their nature, mutual funds are more diversified than investing in a few individual stocks or bonds. You can further diversify your portfolio by buying shares in several funds with various styles and profiles. There are many mutual fund companies, and most of them offer a wide array of funds.
    • While it might seem like a couple of good mutual funds would be enough to compose a portfolio, a properly diversified basket of investments will give you the best mix of growth and stability. Most advisors recommend having no more than ten percent of your portfolio in any one fund or other asset.
    • Your fund portfolio will have the best chance of long-term success if you diversify across a number of unrelated asset classes. This could include domestic or international stocks or bonds, commodities, and other sectors of the economy such as utilities, real estate, precious metals, energy, biotechnology, medicine and finance. Spreading your money across asset classes will help your portfolio avoid the impact of downward movement in one particular industry.
  4. Don't try to time the market. Even the most experienced investor has trouble seeing the future. Buying into a high-quality mutual fund and holding it for a long time (years!) is the best road to investing success. Short-term fluctuations along the way don't really matter very much. The key is to pick good funds with good histories and have the courage to stick with them through thick and thin.


  • Invest for the long term (more than five years). You won't be disappointed. The very nature of "the markets" is such that they are destined to provide decent investment returns if you allow enough time. Short-term investments can sometimes prove disastrous. Long-term picks are usually quite satisfying (unless you demand huge returns).
  • Never decide on which mutual fund to buy based on short-term returns (less that a year or two). Such results can be misleading and should not be used when making a long-term investment decision. Returns from the past ten years (or longer) are a much better measure of a fund's quality.
  • Some mutual funds charge short-term redemption fees. In such cases, if you buy fund shares and then redeem them in less than 60 or 90 days, you will be assessed a one- or two-percent redemption fee. This is meant to discourage short-term trading. If that's the kind of trading you're interested in, there are better venues for you than mutual funds.
  • Some funds are offered in a variety of share classes, typically A, B, C, and I classes. Each class has a different fee structure, including up-front sales charges, deferred charges, and 12b-1 (sales) charges. Your investment timeline will determine the most appropriate share class for you.


  • You can minimize capital-gains taxes by selecting mutual funds with relatively low turnover ratios. These funds tend to hold their stocks and bonds for a long time, thereby generating less in capital gains and losses.
  • Another avoidable charge is brokers' fees. If you bypass brokers and buy and sell shares directly through fund companies, you will not be assessed brokerage fees. Dealing directly with fund companies is simple and less expensive than going through a broker. Some investors like to utilize the advice of brokers when making investment decisions. That advice comes with a price tag. You can get similar (but not identical) advice for free from advisors working for the mutual fund company you select.
  • Watch out for fees. Some mutual fund companies charge sales and redemption fees (known as "loads"). Others may charge a "12b-1" fee to defray marketing expenses. It is possible to avoid both of these fees by picking your mutual funds wisely. Another charge, the "expense ratio," is unavoidable. This fee goes to pay for company overhead. Select a fund that charges an expense ratio of no more than 1%.
  • If at all possible, avoid "loads" (sales and redemption charges) and 12b-1 fees. These charges serve you in no way. They merely represent added profits for mutual fund companies, their sales staff and brokers.
  • Expect taxes. Income tax is owed on stock dividends, bond interest, and capital gains earned within your funds. Your fund company will apprise you of these earnings when it's time to pay taxes.
  • Pay close attention to all fees and charges before you sign up with any mutual fund. Those expenses can eat into your returns significantly. Research funds carefully before you commit money. If at all possible, avoid "loads" (sales and redemption charges) and 12b-1 fees. Check online ratings services (Lipper, Morningstar and many others), or ask for advice from a certified, fee-only advisor or the most financially-savvy person you know.
Users of Guests are not allowed to comment this publication.