A Primer on Investing with Mutual Funds

16 Jul

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Investing in mutual funds is nothing new for many experienced investors but there are those who are new to the investment scene and have yet to realize how they can use mutual funds to their advantage. In fact, it is a common perception among many newbie investors that stocks and shares are the only assets worthy of consideration when one talks about the stock market. This paradigm has limited the reach of mutual funds to serious investors only even if everyone would have been well served to have one or two funds in their investment portfolio.

But a simple change in perception actually does not require a complete shift in the way you look at investments. If you are open to considering new investment vehicles and are limited by your virtual unfamiliarity with mutual funds, consider this short primer as your wake-up call to try and embrace the advantages of MFs in growing your portfolio and diversifying your assets without compromising profitability.

The concept of mutual funds boils down to investing in the stock market by pooling money together from many “small-time” investors. Person A gives his $100, Person B another $300 and Person X another $500; the fund is then collectively pooled together and entrusted to a fund manager who decides how to invest the whole fund. This is an important concept because the decisions of the fund manager determine the risk and profitability of the fund.

Bond funds. These are mutual funds exclusively invested in government and corporate bonds. The interest rates are fixed so the likelihood of profit is limited but the risks are also tamed.

Stock funds. These are mutual funds exclusively invested in stocks and shares. If the shares on which the fund is invested appreciates in value, the fund value also rises. The likelihood of profit is high as stocks and shares can appreciate aggressively on the market but the risks are also higher than in bond funds.

Mixed funds. These are funds which are invested in both bonds and stocks. Some are invested on an even 50-50 split while others can be tweaked to have 70-30 splits in favor or stocks or bonds. More cautious fund investors tend to pick this option because it mitigates the risks but does not completely sacrifice profit.

The best benefit with mutual funds is that you can align the profitability and risk level of the fund to your portfolio by making sure that you are informed of the nature of the fund you are investing in. In particular, mutual funds present considerable advantage in the sense that it will allow you to mix your investments between bonds and stocks at the same time. If you are risk-averse and don’t want all your portfolio to be squarely invested in stocks but also hate the limits of bonds, the mutual fund is your best choice at striking a balance between profit and risk.

To invest in mutual funds, all you need do is to get in touch with a fund manager or investment house that offers mutual fund investments. Talk to one today to find out which fund suits your goals best and learn to diversify your portfolio by picking the mutual fund that will give you the best brand of profit and risk mitigation in one go.

23 Responses to “A Primer on Investing with Mutual Funds”

  1. Ross January 27, 2013 at 8:22 am #

    Hello. Me and my mother just opened up me an IRA. I’m 14 so im obtaining a hop on it. We’re opening a custodial IRA and so i have a lot of questions. Please respond to them all. ( ill check of best solution)

    1-When will i reach choose whether i would like a roth or traditional, after i open the Custodial IRA?

    2-When will the IRA turn from custodoial to my very own? When will i get full charge of the account?

    3- What’s the percent from the IRA?

    4- Does compunding intrest affect all IRA’s?

    I’m Carrying This Out ON Banc of the usa.org

    Me and my mother possess a brokerage account there.

    If you want information to reply to this take a look here -https://world wide web.baisidirect.com/Shared/Modules/accountOpen.php

    Thanks, t

  2. Earl February 7, 2013 at 3:26 pm #

    Thinking of moving 401k into Metlife Investor program.
    I was looking into Vanguard bc lower cost first.

  3. Harvey February 19, 2013 at 10:23 am #

    I have some extra money lying around and my friend was telling me that I should invest into a mutual fund since I have enough, and put it in an account so it can grow on interest so I can build some money up for college and retirement and stuff.

    That sounds great and all, but are there any strings attached/catched to mutual funds? Do I just walk into a bank and say “Hey put this in a mutual fund and just let it sit there and collect money”

    IDK it seems risky and pointless I just want some insight please and thanks so much for helping =]

  4. Margrett February 21, 2013 at 10:56 am #

    I know a lot of these books that people will put will be for beginners, but I would also like to know about books that are more in-depth, or for intermediate to expert level investors.

  5. Bobby February 25, 2013 at 12:15 pm #

    i need help regarding in which field should i invest money stock market or in saving funds .and which is best mutal fund in market today .

  6. Dave March 1, 2013 at 9:39 am #

    Can anyone tell me what is the basic difference between the equity shares and Mutual funds… and from both of them, on investing, we got maximum profit within 1-3 years range.

  7. Trenton March 4, 2013 at 9:28 am #

    Being as I’ve lacked money my entire life I’ve really gotten into reading on savings & investing recently and I’ve been wanting to make sure to start those as early as possible as to (hopefully) maximize returns. Anyhow I’m currently reading The Intelligent Investor and I’m just having a hard time figuring out how I would apply some of the tips to myself. A lot of what I’ve read involves making sure you have a diversified portfolio (I’m early into the book). I know there are no exact numbers to what you want to invest but if I were to invest 10% into say bonds, that would literally be about $20.

    What I’m trying to ask is should I worry about a diversified portfolio right now while I have less than $1,000 in spending money (and I don’t want to spend every dime of my recreational cash) or should I try to stick to something more specific?

    Also any book recommendations would be great.

  8. Lupe March 17, 2013 at 2:08 am #

    What’s the best mutual funds for a time like today?

  9. Cary March 17, 2013 at 6:45 am #

    hey,

    I just want to ask if someone knows (webpage, book) where I could start learning how to invest at the stock market, I want to start but I don’t want to end up in a big failure.

    thank you

  10. Stanley March 25, 2013 at 4:35 am #

    I want to know what type of investments would be the easiest to maintain and the cheapest to start.

  11. Odell March 27, 2013 at 6:52 pm #

    How can I become active in the stock market!? How does the stock market work!?

  12. Sean March 28, 2013 at 10:39 pm #

    For instance i have the money to invest where do I go to the bank? How do i pick the right stock? i really need more information. I have no idea how to start off Please help me someone

  13. Arturo March 30, 2013 at 9:01 am #

    Please do guide me to other websites if necessary. A historical background and analysis would be greatly appreciated

  14. Anderson April 9, 2013 at 1:56 pm #

    I’ve always found finances interesting but now i want to start actually investing in stocks and making money from it. but i dont know what to do, where should i start though how should i go about all this. I don’t want to lose all money, so any mistakes you all have made please inform me.

  15. Jarred April 9, 2013 at 2:30 pm #

    I have about $50,000 I want to invest (or some portion of it). What mutual funds are good? I don’t want to lose it, because I want to go to law school in a few years and want to buy a house.

  16. Brenda April 10, 2013 at 9:50 am #

    New, to mutual funds i would like to familiarize myself with it before getting into it, would like to know the ins and outs, what type of fund to pick and what type not to pick…

    Preferably I would like some recommendations on books meant for Canadians, but if there are books that teaches Great and sound principles for mutual fund investing i’d like that too!

    So thanks for your recommendations on books

  17. Marian April 12, 2013 at 10:06 am #

    My wife and I want to go to a company to start investing our money for retirement as well as get involved in stocks I’ve heard of Morgan Stanley, Smith-Barney etc but I don’t have any knowledge about who is better than who or what I should be looking for when I go to one of these companys.

  18. Dustin April 24, 2013 at 12:25 am #

    Every time I look at it (lately, at least), the rate of return is in the negatives (but not more than -2.5%). Would it be better to redirect the money that I am currently contributing to the 401K to a savings account or a Roth IRA? Also, what exactly are ‘shares’, and how do they relate to a 401K?

  19. Emery May 6, 2013 at 5:33 pm #

    I am 18 years old, and have decided to start investing some of my money. I have around $15,000 saved up. After doing some research, I find it smarter to invest money where it has a chance to grow, rather than sit idle in my savings account. I want to open up a Roth IRA, but also want to invest in stocks, index/mutual funds, ETFs, REITS, etcetera. I want to start investing, but am a little confused as to how. Should I go with the big names like Fidelity, T Rowe. Price, or Vanguard? Or a discount broker like E Trade or Scottrade? I want to do some active trading, too, not only passive investing. I want to be able to trade a bit on my own as an attempt to make some extra income. Which company should I use? Also, I know Roth IRAs are great because they’re a gateway for financial independence for retirement, but is there any way for me to make good money from investing, say, in my 40s? Would I achieve this through dividends? Just some general advice is appreciated, sorry for the long message.
    I’m also a big fan of real estate for the sole purpose of investing. One day, I plan on buying a medium sized apartment building from a family friend.

  20. Cherilyn May 7, 2013 at 1:08 am #

    I need some ideas on what type of stocks and mutual funds are good for long term investing but won’t lose me a lot of money in the near future. Thanks!

  21. Ross May 12, 2013 at 12:44 pm #

    I wanna know what stocks are starting from low and are starting to climb up before it reaches its peak. Like gold minning, technologies, biotech, energy, computers, websites,natural resources, good chinese and indonesia stocks too. If chinese and vietnamese currency is good to invest in and mutual funds to. I know house market is down but do u think its good to buy b/c its pretty low stocks from before.

  22. Johnnie June 28, 2013 at 10:48 pm #

    I signed up for optionshouse.com and tried using the virtual trader to trade mutual funds and it seemed pretty strange. It is my first time investing and I have already done all of my research and know what I would like to purchase. I’ve looked into TradeKing and Scottrade. I can’t use e-trade because there are penalties for not being extremely active and I am using a long-term buy and hold strategy. Thanks for the help!

  23. Tangela August 3, 2013 at 4:21 pm #

    No one is answering on the Investment section, so I thought I will ask here if that’s okay.

    My family is receiving 500k from an injury lawsuit. We will spend about 200k of it for things we need, and that will leave about 300k left. I live in the US and even though I’m only 15, I’m advising my parents to put the savings in Swiss Banks because I pay attention to Austrian Economics and it seems the constant printing/fiat money system will continue to devalue our dollar, as well as the Euro. As far as I know, the value of Swiss Franks is pretty stagnant. Is that a good idea – putting 100k in Swiss Banks to retain value?

    As far as the remaining 200k goes, I’m trying to use this opportunity to grow value. Everything bursts and bubbles in this stupid economy, so I’m immediately against any kind of stocks. I was thinking it would be a good idea to invest in income property to receive payments from that, perhaps? My mother is scared because she asks me “What happens if something breaks down?”, but I’m not educated enough to know any other profitable investments.

    Does anybody have any ideas?

    Thank you
    Thanks for you reply! Things like Facebook and Microsoft were GREAT investments in their infancy, but not so much now, unless anyone can create it. Once they’ve past peak popularity, I think the investments are rather stagnant, and some are even having losses like Facebook. Well, we’ll see 🙂 I still have some research to do

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