Mutual Funds – An Introduction
Whether you are a savvy investor or just a beginner who wants to gets his or her feet wet in the investing world, there is a good chance that you know about mutual funds. By definition, mutual funds are investment vehicles that will allow you to buy investment holdings in various companies and markets, by buying just one investment vehicle.
For example, instead of buying separate stocks in hundreds of technology companies, one can simply invest in mutual funds with a technology portfolio. Below, you will find a few basic details about mutual funds that will help you understand the popular investment vehicle better.
How to choose mutual funds?
This is a very objective question that will depend on so many factors that are relative to you. For example, the choice of mutual funds for you will depend on factors such as your willingness to take risks, your investment horizon, your preferences to invest in certain markets and so on. So, if you are a investor who is interested in the communications industry and have a 10 year investment horizon and are also willing to take a fair amount of risk, you will look for mutual funds that have that similar criteria. The market is full of a diverse set of mutual funds and there is a very good chance that one of those mutual funds will match your needs, or at least come very close to matching your needs.
Be aware of risk
Though mutual funds are supposed to be baskets of investments in various sectors, industries and companies, they still do carry a fair amount of risk, especially in today’s market condition. So, when investing in mutual funds, one should always perform their due diligence to gauge the risk factor. Again, this will vary from person to person, depending on their investing aggressiveness and ability to take risks.
Invest in many mutual funds
This point of advice is along the lines of the tip that was just mentioned above. Though there are some large mutual funds that have a great diversification factor, it might still be a good idea to invest in many mutual funds, as opposed to dropping all your investment on one large mutual fund. When it comes to diversification in investment, there really is no maximum or what you call as overdoing, as long as the mutual funds or other investment vehicles are chosen with diligence.
Costs of investing in mutual funds
Mutual funds are put together by financial companies who will charge you for the convenience offered by mutual fund vehicles. Common fees will include front load and back load expenses. What this essentially means is that you will have to pay a %, typically about 5%, as a fee, when you get in and out of mutual funds. So, if you are investing $10,000 in mutual funds, you will have to pay $500 as a front load fee and invest the remaining $9,500 into the mutual funds. When you sell your mutual funds, you will again have to pay 5% of the sale price as a fee. The fee structures varies from fund to fund and some funds will also charge you an expense ratio, where you will pay about 1-2% of your investment amount as ongoing expenses, for the duration of your investment in that particular fund.