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If you are just beginning in the investing world, you may have heard that mutual funds are a good place to get started. Is that true? Well, only you can decide what you should be investing your money in (after all, it is your money!).
Getting some basic facts about mutual funds is a good place to start. Read on for a brief overview of mutual funds….
What Are Mutual Funds?
A mutual fund, in simplest terms (and aren’t those always the best terms?) is just a group of investments that the mutual fund company you go with has decided to invest in. This can be a different collection of bonds and/or stocks, and even real estate.
What Are the Pros and Cons of Investing in Mutual Funds?
Mutual funds may make your life easier if, say, you don’t want to spend your day pouring over stock reports and picking out individual stocks to invest in. With a mutual fund, you pick one then sit back and relax (well….maybe you shouldn’t go that far….).
Mutual funds are managed by professional investors—this might sound like a “pro,” but some people don’t necessarily think so. Many people wonder if these professionals know anymore than they do when it comes to investing.
However, even though some people have their doubts, there is something to be said for letting someone else do all the work, including all the research and the analysis that you probably don’t have the time (or the expertise) to do.
Another pro: you can start investing in many mutual funds with only a couple of thousand dollars or even less. (“Oh, is that all?” you are saying.)
True, this might sound like a lot if you are just starting out, but if you took this amount of money and invested in different stocks and bonds on your own, you wouldn’t end up with such a diversified portfolio (a diversified portfolio is good because it helps you weather rocky times in the stock market. If one stock goes down, you have others to buoy up your portfolio).
Liquid and Easy
Mutual funds are known for being liquid, another plus. This means that if you need cash quickly, it is fairly easy to get back the money you invested (although you should definitely check with the mutual fund company on how this works before handing over a check).
Mutual funds are also known for being easy. They are easy to set up–it is as easy as filling out a form and handing over your initial investment. Future investments are as easy as authorizing bank transfers. And, many fund companies offer the ability to conduct online transactions.
So How Do I Get Started?
As with everything else that has to do with your money, you should start by doing research. Luckily nowadays this is as simple as turning on your computer.
If you want to do some hard research into the different types of mutual funds and how they’ve fared recently, you can check Morningstar.com.
Then, you’ll want to research which company to start your mutual fund with—some of the most well-known are Vanguard, T. Rowe Price, and Fidelity.
Other Things to Consider
Some other things to consider before you invest. For one, what fees will the fund manager or fund company charge? These are known as “sales loads,” and it is possible to avoid them by finding “no load” funds (which are by no means of lesser quality–they can be just as successful as funds with all of those annoying fees).
Another thing to think about: something the experts call “risk tolerance.” If you are just starting out with a few decades before retirement, you can pick a fund that has a bit of risk involved. Stock funds, for example, are known to be a bit riskier–but also have the potential for great returns.
And, as with everything else you do in life (right?) you have to consider what taxes you’ll have to pay. It is possible to find funds that lessen the pain of paying taxes a bit.
One last thing to consider: make sure you read the fine print before investing.
These tips are just the beginning when it comes to jumping into the world of investing in mutual funds. But a little research can go a long way–it may be a bit scary now, but in no time at all, you’ll be a mutual fund expert.