Investing in Mutual Funds: Everything You Need to Know
If you want to start investing, mutual funds are a great option to explore. But like any investment, you need to know what you're putting your money into before you begin. Here's what you should know about this particular type of fund in your investment portfolio.
What Is a Mutual Fund and How Does It Work?
Let's say you want to invest in the market. There are a little over 4,000 publicly traded companies in the U.S. stock market, meaning that you have over 4,000 options for which stocks to invest in — and that's just one type of asset in one country. You might also want to invest in bonds or commodities, or perhaps even diversify your portfolio by investing in global markets. Mutual funds make it easier for individual investors to get into the market and invest with less stress.
A mutual fund collects money from individuals, pools all of that money together, and then has a professional fund manager invest it on behalf of the group of individuals who had put their money into the mutual fund. The invested money is managed according to set goals, which means you can choose to invest in a fund with goals that align with your own financial objectives.
You can also choose between an open-end and closed-end mutual fund.
- Closed-end Funds: These funds are publicly traded and have a set number of shares issued. They trade on an exchange and are more liquid than open-end funds; prices trade at a significant discount or premium to the NAV based on supply and demand throughout the trading day.
- Open-end Funds: These funds do not have a restriction on the number of shares the fund can issue and aren't traded on exchanges. They are less liquid than closed-end funds, and are priced at the NAV at the trading day’s end.
Should You Use These Funds for Your Investments?
Most investors should consider mutual funds because it allows for an easy way to create a well-managed, diversified investment portfolio. The funds are managed by a professional, which means they take care of all of the decisions required to invest.
Mutual funds give you the ability to invest in specific market sectors (for example technology), or specific market indices (for example the S & P 500). Investors may want to consider mutual funds as part of a diversified investment portfolio.
Potential Facts to Consider
The convenience of professional management, the ability to easily diversify, and flexibility inherent in mutual funds are all great reasons to consider using these vehicles to build your investment portfolio. But there are some additional facts to be aware of before you make that decision. These funds come with fees for the professional managing service, and fees vary widely from fund to fund. Check out the expense ratio before investing in any mutual fund.
If the fund sells assets, it distributes any capital gains to the individuals invested in the fund. Investing this way could subject you to a less advantageous tax situation since you don't get to decide what or when the fund buys and sells assets.
For most investors, however, the pros tend to outweigh the cons. Mutual funds can offer a great way to start growing your finances in a way that's easy, accessible, and convenient. If you want to figure out what kind of fund would make the most sense for you, it may be time to reach out to a financial advisor who can look at your financial situation and make personalized recommendations.
