Diversification is important when it comes to investing, and buying a mutual fund is one of the best was to get the diversification you need. Mutual funds work by pooling the investments of many different individuals and organizations and using those funds to purchase a widely diversified basket of stocks, bonds and other types of investments. Once you have your mutual fund portfolio in place, you can add to it on a regular basis until you build the nest egg you need.
Contact several low cost mutual fund companies and ask for a prospectus for their index funds. Index funds are a good way to get started since those funds are designed to replicate the performance of an underlying index, such as the Standard & Poors 500 index. You can also buy an exchange traded fund (ETF) as a substitute for an index mutual fund. ETFs have low expenses and are easy to buy through an online brokerage account. The fact that index funds tend to perform better than managed mutual funds is important as well. A study published in "Money Magazine" found that in most years, the majority of managed mutual funds fail to beat their respective indexes.
Complete the application for the mutual fund. You will need to provide your name, address and Social Security number to allow the mutual fund company to report your earnings to the IRS.
Set up an automatic monthly investment from your bank account to the mutual fund. This approach is known as dollar cost averaging, and it allows you to buy more shares of the mutual fund when the fund is down and fewer when it reaches all time highs.
Branch out into other types of funds as you accumulate more money. In addition to index funds and index ETFs, you can buy growth funds, value funds, sector funds and international funds. Growth funds focus on companies in their rapid growth phase, when both earnings and revenue are growing rapidly. Value funds invest in more mature companies with stable, predictable earnings. Sector funds focus on a particular part of the market, like oil, utilities or retail. International funds invest in companies whose primary source of revenue is outside the United States.
Keep copies of all your purchase confirmations with your tax records. You will need this documentation to compute your capital gains when you sell your shares.
Items you will need
- Mutual fund prospectus
- Mutual fund application
- Jupiterimages/Photos.com/Getty Images