If you’re a person who wants investing to be more like getting takeout, mutual funds are likely one of the easiest ways to get started. You don’t need a million dollars, you don’t need a finance degree, and you certainly don’t need to remember stock tickers like flashcards.
Rather than you buying one really expensive stock, hoping it’s Tesla 2.0, you throw your money into a massive pile, along with a ton of other investors. Then a professional manager invests that pot in a bunch of investments: stocks, bonds, and sometimes even commodities.
Instead of buying just one company, you end up owning a piece of many companies, like buying one slice of a pizza that has every topping on it.
To give you an example: Let’s say you have $1,000. Some stocks can cost more than that, which means it may not even be possible to buy one share of a company. However, with a mutual fund, your $1,000 buys you a piece of hundreds or thousands of investments. It gives you access to investments that you likely would not be able to afford on your own.
Diversification
This is one of those buzzwords financial professionals love to say, but it’s really practical.
If one company in your fund completely goes under, it’s probably not going to ruin your investment because your investment is spread out across multiple companies, unless every single company went bankrupt at the same time and then we have a much bigger problems than a poor investment.
Who Should Invest in Mutual Funds?
Short answer: pretty much anyone. It makes life easier for you regardless if you have $100 or $1 million to invest.
- No stock picking stress
- No need to track dozens of companies
- No need to continually buy and sell
Instead of managing hundreds of separate assets, you can get a good investment portfolio with only one to four different funds.
Types of Mutual Funds
They can be classified several ways, but the most common breakdown looks like this:
- Stock funds
- Bond funds
- Commodity funds
- Mixed/hybrid funds
Then it gets more detailed:
- a fund of U.S. companies,
- or international companies
- also can gauge on size: small cap, mid cap, large cap
- passive index funds vs. actively managed funds
It’s similar to walking into a coffee shop. Same concept, but tons of variations.
Minimum Investment: It Is Not That Much
Some mutual funds allow you to start with:
- $25
- $100
- $500
- $1,000
There are also some major institutional funds that will require you to invest tens of thousands of dollars but this isn’t the case for a beginner.
The bottom-line here is that you don’t need to be wealthy to help start you investing.
Fees
There are two types of avenues of fee to be aware of:
- Loads
That is sort of a commission to buy or sell. So if there is a 5% load charge then if you put in $100 into a fund – only $95 is made available for investment. Most funds today do not use these charges so always seek to use the no-load specific funds.
- Expense Ratio
Also known as the silent percentage taken from your investment every year to pay the fund manager, operations, etc. A great example of an expense ratio is at around near 0% for indexed funds and greater than 1% for actively managed funds which often don’t make sense for you to use.
The bottom line: the lower the expense ratio and load = higher return over time.
Where You Buy a Mutual Fund Matter (but in a nice way of saying)
You can either.
- Buy directly from the fund company or
- Buy it through a brokerage platform
Usually both avenues give you the same investment but just at different or separate platforms.
While exchange-traded funds (ETFs) and cryptocurrencies may generate more trendy media hype, mutual funds offer an extraordinarily effective way to build wealth, for the simple reason that:
- They mitigate risk
- They simplify the investment process
- They are low-maintenance
- They are accessible to both beginners and experienced investors
In short, they are the slow cookers of personal finance: set it and forget it, check in sporadically once a year, and over time you will see growth.
So, what should you do?
First, you will need to identify:
- How much risk you are comfortable with
- If you want exposure to stocks, bonds, or both
- If you want a passive index fund or something that is actively managed
Then look for:
- No-load funds
- Low expense ratios
- A reputable fund company
And that is really enough to get you started.
If you are wondering:
- What is a mutual fund?
- How do they work?
Now you know: a mutual fund is simply a beginner-friendly way to invest in a ton of companies at once without needing a ton of money, a ton of time, or a ton of expertise.
