Mutual Funds – An Overview

Mutual funds leverage a pool of money provided by investors to invest in bonds, stocks, and other assets. Every mutual fund is made up of shares from different organisations, with the mutual fund manager deciding where best to place the pool's investment.

Investing in mutual funds is considered to carry a lower level of risk when weighed against buying individual stocks. This is because if one company within the fund portfolio is performing poorly, the rest of your investments can balance it out.

Net Asset Value, or NAV (sometimes NAVPS) is the price of each mutual fund share and is calculated by dividing the total value of investments by the number of outstanding shares.

What Types of Mutual Funds are Available?

Mutual funds fall under one of four categories; fixed-income funds, money market funds, balanced funds, and equity funds. Within each of these four categories are thousands of mutual fund investment opportunities.

But how safe are mutual funds? Like any investment, mutual funds carry an inherent level of risk to your capital; and there is no guarantee you will profit. Stock markets can be wildly unpredictable at times, and it is only through experience that we can learn to spot trends and really make our money work for us.

With that being said, since mutual funds are made up of multiple investments – if one stock is performing poorly the rest of your investment pool might be making up for those losses. For this reason, mutual funds are popular among investors of all levels, from beginners to highly experienced.

How Do I Set-Up My First Mutual Fund Account?

The first step to investing in mutual funds is having money to invest. It is unwise to jump into investment opportunities with money that you can’t risk losing – so don’t go investing your rent money expecting to become a millionaire before the landlord comes knocking.

Luckily, many companies will allow you to begin investing with as little as $100, and I would always suggest this as a starting point for beginners. 

Once you have decided that you want to invest in mutual funds, it’s time to find a broker. You can easily find an online broker to suit your needs with a little research. While you are researching a broker, be sure they are transparent with their fees.

A percentage of your investment will go towards fees, and actively managed funds charge a premium when compared to passively manage accounts – make sure you are happy with your choice. So, now we know how much we want to invest, and have found the broker we want to use; it’s time to open an account.

Once an account has been opened with your broker, you can place an investment by buying mutual funds. From there, you can check into your account periodically, and monitor the health of your investment.

You should regularly track your return on investment and manage your investment portfolio accordingly. Check out a site like crediful.com if you’re looking for advice on how to best do this. 

How is Money Made Through Mutual Funds?

Money made through mutual funds, like any stock or security investment, comes through the ROI of your investment. Meaning that, if you purchased $250 worth of shares in a mutual fund and 6 months later your shares are worth $500, you have doubled your money for a 100% ROI.

You can then decide to sell your shares and pocket the profits (minus any applicable taxes and fees) or speculate that the share value will increase in the future and keep hold of them. However, the market conditions may change, and your share value may actually decrease, resulting in a negative ROI.

Mutual funds are a popular investment choice for beginners and market pros alike because they are naturally diversified and, in most cases, managed for you. Not only that, but mutual funds are highly liquid, meaning you can sell them as necessary for a quick cash injection when needed.

What Next?

Now that you are armed with a basic knowledge of what mutual funds are, and how they work; you need to decide if it’s the right investment opportunity for you. There are thousands of resources online, and even more mutual funds on offer.

The best thing to do is take your time and find the right broker and investment that works for you. The biggest mistake you can make is rushing to invest your savings with the expectation of becoming rich quickly – investing is a long game and requires patience.