Mutual funds are an investment strategy, so you can put your monies together with others and purchase a collection of bonds, stocks, and other securities. In a sense, a mutual fund is a basket filled with various types of investments, typically stocks. A mutual fund will allow you to invest and still mitigate the risk of picking individual securities.
Investors in a mutual fund do not choose the stocks; they merely pick the type of funds that best fit them. As an investor, you own shares in a company that buys shares, or government bonds, and other securities. You will equally share in the losses as well as the profits in the fund’s total holdings. This sharing of the fund’s total holdings is where the term ‘mutual’ fund comes from.
Why People Invest in Mutual Funds
There are more than a hundred million Americans who invest in mutual funds. Investors are drawn to these funds due to their affordability, instant diversification, and simplicity. This type of investment allows you to have a professional manager who can easily buy or sell the different investments, rather than building a portfolio yourself with one bond or stock at a time.
How You Make Money with Mutual Funds
There are three sources that allow your cash or value of a mutual fund to increase:
- NAV (Net Asset Value)
- When the value of your fund increases, the price to purchase shares in the fund also increases. This action is much like purchasing or selling stock according to it going up or down in value. The increase doesn’t mean you receive immediate distributions, but the value of your fund increases. This increase means you would make money if you decided to sell.
- Dividend Payments
- Mutual funds can receive interest or dividends on the securities within it. These amounts can be distributed proportionally to the investors. It is your choice when you purchase a mutual fund to have these amounts distributed to you or reinvested in the fund.
- Capital Gain
- If the security goes up in price and your fund sells it, this is considered a capital gain. The same is true if the security loses value and is sold, this would be a capital loss. Typically mutual funds distribute capital gains annually to their investors.
How to Purchase a Mutual Fund
There are five steps involved with the purchase of a mutual fund:
- Choose whether you will go passive or active
This step is perhaps the most significant step when deciding to purchase a mutual fund. Mutual funds that are actively managed are done so by professionals who perform research on what to buy. Their goal is to beat the market. There are fund managers who are able to achieve this in the short term, but it is difficult to outperform the market regularly.
Passive investing is the most common approach as the funds are cheaper and you will encounter fewer fees.
- Decide What Your Budget Will Be
There are two ways to determine what your budget should be when considering the purchase of mutual funds:
- How much you need to get started as most mutual funds require a minimum amount to open. While there are some that require no set amount, some will ask from $500 to $3000 to open.
- How you should invest your money. Going with stocks is a means of faster growth of your fund over the bonds that are steadier in returns, but slower. If you are young, you have time to ride out riskier bets, but if you are close to retirement, you may want to consider the more conservative markets.
- Where to Buy Mutual Funds
You will need a brokerage account when you decide to invest in mutual funds. Talk with the financial experts at KBG Insurance & Financial to decide which investments will help you best in your future.
- Scrutinize and Understand Mutual Fund Fees
Fees and not always easy to understand upfront, but it will be well worth your time and effort to talk about these amounts. Fees to watch for are:
- Annual fees
- Front-end sales loads
- Back-end sales loads
- Percentage fees
Your financial advisor at KBG Insurance and Financial will explain these fees and identify any that will be applied to your fund.
- Manage Your Portfolio
After you’ve determined the mutual funds you want in your portfolio, arrange to talk with KBG Insurance and Financial on an annual basis to rebalance your account. Discussing the progress of the account will allow you to keep it in line with your diversification plan.
Where to Learn More About Mutual Funds
KBG Insurance & Financial will help you build a strategy for a successful financial future. Our team of experts is ready to build a plan with integrated tools that will keep you moving forward to a financial, worry-free future. Life brings unique opportunities to all of us, and we are ready to make sure you are financially prepared to handle them all.