Mutual funds have been a very popular investment used to save money and create wealth for quite some time. The problem is that a lot of people don’t even understand what exactly they are, or how they can benefit investors. Thus, a few things need to be clarified so that everyone can understand mutual funds a bit more. So get comfortable and read through these 10 essential pieces of information when it comes to mutual funds.
1. What is a Mutual Fund
Essentially a mutual fund is a way to combine cash from a number of different investors in order to create a portfolio of different securities such as bonds and real estate. In the end each investor gets a percentage of the money that is created.
2. Mutual Funds are a Great Way to Diversify
If you want to create a diverse portfolio of your own it will usually take a substantial investment. However a mutual fund is a great way to take advantage of a number of investment opportunities with a much smaller investment on your part.
3. Always Consider Risk as well as Reward
A lot of people only look at the potential return for their mutual fund. It is important to weigh the risk involved with the investment as well. If you are concerned with potential loss try to stick to low risk options. Returns aren’t everything so keep that in mind.
4. There are Different Types of Stock Funds
The variety of options is seemingly endless when it comes to stock funds. You can look into sector funds, index funds, and growth funds which are all viable options for smart investment. Growth funds deal with full shares of growing companies, index funds deal with shares of stocks with different indexes and sector funds are shares for particular sectors within a company.
5. There Are a Variety of Bond Funds too
If you are interested in safer investments you can look into government bonds. On the other hand if you are willing to risk your money you can opt for high-yield bond funds. On top of those, if you are looking to lower your tax bill you can consider the opportunity for municipal bond funds.
6. The Importance of Index Funds
Index funds are often referred to as passive funds and are a great way to keep tabs on certain important markets. On top of that, index funds are often much more tax efficient and there is no risk that your portfolio can change drastically thanks to decisions made by the fund manager. Better yet, these passive funds can often end up outperforming active funds over time.
7. Low Costs are Important
When you first start to look into mutual funds it may seem that expenses are not that big of a deal. This is not necessarily the truth. Funds will charge a percentage of total assets and over time it can really affect the performance of your portfolio.
8. Taxes can Damage a Fund’s Performance
A misconception that some people have when it comes to mutual funds is that they won’t feel the effects of taxes if they do not sell their shares. There is a chance that you could owe taxes even on funds that have lowered in value. Tax efficient funds can help cut down on rapid trading and help you keep away from the sting from Uncle Sam.
9. Do not Quit on Funds too quickly
Most mutual funds do end up having off years. This type of year may tempt you to sell, but quickly dumping funds can bite you back later. If it doesn’t trail other comparable funds by a large margin then sit on it and see if it can turn around.
10. Do not Jump on Big Winners
Many investors are eager to jump on funds that rank very high over a certain time period. The truth is that these funds often level out and do not top the rankings later on. When choosing a fund look for one that has been consistent over an extended period of time.