Many investors who don’t have the time to study the stock market or a particular company opt to invest in mutual funds. It’s the easiest way to diversify your portfolio and keep your risks at a minimum.
When it comes to investing in mutual funds, you have quite a few categories from which to choose: growth, value, large-cap, sectors (specific industries: technology, healthcare, banks), index funds (S&P 500, Dow Jones Industrials Average), balanced, international, and even bond funds.
Unlike stock investors who look at a company’s fundamentals, mutual fund investors can get a good sense of how one is performing or might perform by looking at its trends. There are many complicated systems for identifying when trends may rise or fall. None of them are fool proof, but they can be helpful in choosing the right mutual fund at the right time.
The Benefits and Drawbacks of Investing in Mutual Funds
Ultimately, before you invest in a mutual fund—or any investment tool for that matter—you need to determine how much you can afford to lose. Is it 10%, 20% or 0%? Once you have a number in mind, you can look at the performance of a particular mutual fund to calculate a typical loss. If it makes you wince, keep on looking.
If a fund can go up by 30%, it can go down that much and more. Even in a portfolio of only mutual funds, it’s important to diversify. For example, choose a large-cap fund that owns stable companies that offer steady growth and complement it with a small-cap fund that holds value-oriented stocks with a quicker and larger potential for growth.
The price for a share of mutual fund is determined by the net asset value, or NAV, which is the total value of the securities the fund owns, divided by the number of fund shares outstanding.
If a mutual fund has a portfolio of stocks and bonds worth $10 million and there are a million fund shares, the NAV would be $10. A fund’s NAV changes every day, after the market close, and reflects the price fluctuations of the fund’s holdings.
Tips for Investing in Mutual Funds
Tip #1: Stick to no-load funds.
Tip #2: Buy from discount brokerages.
Tip #3: Be aware of market trends.
When you go to buy a mutual fund, do it through a discount brokerage where fees and commissions are lowest. To save money, look for no-load funds. These funds will not charge you a fee (sometimes up to 2% or 3% of amount invested) when you sell it. This becomes extremely important as your portfolio grows.
The only way to avoid paying commissions on load funds is never to sell, and that’s not a good idea either. You need to pay attention to how anything you own is performing and determine a point at which you will sell—based on your tolerance for risk.
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