Perhaps the best investment advice of all time is don't put all of your eggs in one basket. In the world of investing, that is known as diversification, and it means having a portfolio with a number of different investments. It can be a challenge to obtain a properly diversified portfolio, particularly if you are on a limited budget. That's where mutual funds come in. Mutual funds provide both diversification and professional management, and they are easy to buy.
Determine your investment objectives. There are a number of factors to consider, including your age, how much money you have to invest, how long you can leave your money invested, what you want your investments to do for you and your aversion to risk. Younger investors typically can afford to take more risk with their investments than older people who may be more interested in capital preservation. If you are the kind of person who lies awake at night worrying whether your stock portfolio might lose a point, you may want to consider mutual funds that invest in government-backed securities. There are different types of mutual funds that match virtually any investment objective, including ultra-safe government money market funds, bond funds, aggressive growth funds, market sector funds, international stock funds and market index funds.
Select several mutual funds that meet your investment objective and request a prospectus from each. A prospectus is a document the U.S. Securities and Exchange Commission requires mutual fund companies to provide to potential investors. It includes important information regarding the fund's investment objectives, investment strategies, fees, sales charges, management, the composition of the fund and much more. You should pay particular attention to the fees and expenses charged by each fund and compare them to other funds you are considering. Some mutual funds implement a sales charge, or load, either when you purchase shares or when you sell shares. Some funds, referred to as "no-load" funds, do not implement a sales charge. You should also pay careful attention to the fund's performance history on both a short- and long-term basis. Keep in mind, however, that past performance is never a guarantee of future results. Mutual funds can and do go down in value.
Purchase your shares. Unlike stocks, shares of mutual funds cannot be purchase on the open market. They must be purchased directly from the mutual fund company. Most mutual funds include a subscription form with their prospectus that can be filled out and mailed directly to the mutual fund company along with a check for the amount you wish to purchase. Many mutual fund companies also have a website where you can purchase shares electronically and fund your purchase through a bank transfer, credit card or debit card. Many stock brokerage firms will act as intermediaries to sell mutual fund shares to you, but some firms will only handle loaded funds, since they make no commission on no-load funds.
Keep a watchful eye on your investments and your investment objectives. It is likely that your investment objectives will change as you age. You may have more discretionary money to invest. You may become more concerned with the tax ramifications of your investments. You may grow more conservative with your money as you get older. Many mutual fund companies offer a family of funds, with each fund focused on a different investment objective. Many of these mutual fund companies will allow you to move your money among funds within their family without incurring additional fees. Keep in mind that if you move funds from one family of funds to a different mutual fund company you may incur additional fees and sales charges.
- All investments, including mutual funds, involve an element of risk. Unlike money in bank accounts, mutual funds are not insured by the Federal Deposit Insurance Corporation, even if the securities they invest in are. Investors may lose some or all of their investment.
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