Before you begin investing in mutual funds blindly, you need to have a firm grasp of what they are and how they can work for your financial portfolio. A mutual fund is designed to pool money from thousands of different investors to create a “fund” of securities such as real estate, stocks, and bonds. Each investor that owns a piece of the fund gets a portion of the total profits. Mutual funds are a great tool to diversify your investments if you play it smart and stick to a few simple guidelines.
Select the Right Kind of Mutual Fund
Mutual funds come in quite a few flavors. You can buy stock funds if you want faster returns. Stock funds are essentially mutual funds made up of stocks. Some kinds of stock funds are made up of stocks in a particular sector of the economy, like technology or insurance. Other stock funds contain shares of stocks from every company in a certain stock index.
If you’re more interested in slow, safe growth, then you may decide to opt for government bond funds instead. There are also high-yield bond funds, but you must deal with a higher level of risk as well if you choose to invest in these kinds of mutual funds as opposed to government bonds.
Figure Out Your Level of Risk
Once you’ve settled on the kind of mutual fund you want to purchase, you must then decide what level of risk you are willing to accept to get the returns you desire. Before you even think about buying a fund, you should speak to a certified financial advisor about your plans. With your advisor, examine how much risk the investments carry within the fund you’re interested in. Ask your advisor whether the fund will have the stability to weather nasty market dips and spikes. The advisor is not a mind reader by any stretch, but an informed opinion from a paid professional can help you make a better choice than trying to decide on a fund yourself.
Watch Out for Overhead
Mutual funds have to make a profit, too. Each fund charges each investor a percentage of the total number of assets in the fund. This may equal to only a handful of percentage points in a year’s time, and to most people, that may not seem to add up to much. However, as with most things in the financial world, the devil is in the details. Ask your financial advisor about all of the fees related to the fund so you will understand how much the fund will truly yield before you invest in one.