What is a Mutual Fund?
A mutual fund is by far the safest, best investment you can ever make. As a matter of fact, it’s the easiest way to become a millionaire today! If you don’t believe me, I’ll try to convince you. A mutual fund is an investment where investors pool their money to invest in several stocks, bonds or commodities. The fund is operated by money managers whose sole goal is to make the highest possible return, year after year. Money managers typically have their own strategy and philosophy when it comes to investing, which can be found in the mutual fund’s prospectus. Some mutual funds use buy and hold strategies, solely focus on providing consistent income, or frequently trade and distribute capital gains to their investors.
Why should I consider looking into Mutual Funds?
Investing in mutual funds has several benefits. Not everyone is cut out to trade stocks, and you could lose thousands of dollars if you don’t know what you are doing. Mutual funds allow investors to diminish their risk by joining a pool of investors versus being the lone wolf. Why not have someone else manage your money, right? In addition, there’s still the potential to gain solid returns year after year. Managing your stock portfolio can be quite daunting, especially if you are trying to sustain solid returns for years on end. Did I mention that some mutual funds pay dividends? Some investors use the funds as income. You’re probably asking yourself at this point why isn’t everyone doing this.
“Let me get this straight, I get to invest my money in a fund that does the work for me. I have the chance to gain some solid returns, and another avenue of income and all I have to do is give them my money?! Sign me up!” Hold on there, before you start putting your money into every fund that you see on your screen, let me walk you through somethings to consider.
READ THE PROSPECTUS
The prospectus gives you information on the following: the mutual funds strategy, money managers philosophy, financial information including the expense ratio, historical rate of returns, and list of stocks, bonds, or commodities the fund invests in. ALWAYS read the prospectus before investing in a mutual fund. Investing in a mutual fund without reading the prospectus is like putting IKEA furniture together without reading the instructions. Know what you are putting your money towards before investing. Click here if you have no idea how to read a prospectus, which is a viable step to knowing what to look for when investing.
Look at the fees
You didn’t think you could just invest your money for free right? One of the fees you’ll typically pay when investing in the fund is the expense ratio. The expense ratio is the percentage of how much each investor pays per year for the fund to operate. Typically index funds have a lower expense ratio (<1.0%) than others, as index funds’ sole purpose is to mimic the movements of indexes such as the S&P 500, NASDAQ, and the DOW. Also, index funds require less management staff versus funds that are actively trading. A good rule of thumb for expense ratios is high risk (higher expense ratios), high rewards (bigger potential returns). Don’t take my word for it. Take a look at the fee table within a prospectus, so you know what to factor into your total investment. Always look at the mutual funds historical returns to ensure you’re investing in something good.
Look at the performance
The best part of looking at the mutual fund is it’s RETURNS!! The performance section of the prospectus gives you a chart, table and rate of returns over a 10 year period giving you an idea of the tropics and storms the fund has faced historically. It also details the funds best and worst calendar quarters, which allows you to give yourself a gut check. Think about it. If a fund’s worst quarter is -35%, will you be able to stomach another plummet in the future? Analyzing a funds performance is key to making sound investment decisions.
How to make a sound investment decision
When it comes to investing, your first step should be establishing investment goals. Here are some questions you should ask yourself. Why do I want to invest (grow my money, or create a stream of income)? How much do I want to invest ($1,000, $5,000, $10,000)? Do I want to invest solely in tech companies? Or go with the tried and true blue chip stocks? All of these questions should help you in forming a sound investment strategy. Here are several mutual funds to look at in getting started:
In considering how much to invest, I’ve added an investment calculator showing you how much your investment can grow depending on the investment amount, rate of return, and the number of years the funds are invested in the mutual fund. Check it out!
Run some scenarios where you take the returns of the 3 funds above and see what the value of your investment could be if you were to invest in the fund. This is a great exercise to get an idea of how much you want to invest. Use the calculator as tool to see how ideal investments look going forward!