Mutual Fund Investing and Investments
Mutual fund investing is a great place for the beginning investor to start dipping a toe into the market. However, before you make your first mutual fund investment, there are a few things you should know.
These 6 points don't cover everything there is to know about the mutual fund market, but they're a good place to start learning enough so that you can confidently start making investments.
Mutual fund investing is often marketed strongly towards new investors.
Many times, a mutual fund investment can be a good fit for a first investment, but do your homework first.
The aggressive marketing of some funds means that you need to cut through the salesmanship and try to get a good understanding of how your money is being used before you buy in.
Ultimately, the goal of any investment is to make money over the long term, and you need to do your homework to make sure that's what happens.
Mutual Funds Allow a Lower Cost of Entry
When you start mutual fund investing, you're buying into the fund itself.
You might look at all the assets that a mutual fund holds and wonder how on earth you can afford to buy all of those securities.
Even if you can't, you can still benefit from their growth.
This is because the mutual fund pools all the money put into it by all of its investors.
It then buys securities using that pool of money, which means that you might only own a fraction of a fraction of a given security, but still benefit from its growth.
Determine Your Risk Level
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One advantage of mutual fund investing is that they typically allow the investor to determine his or her risk level.
As with most types of investing, you have to weight your predicted rate of returns versus the amount of risk that you're willing to take.
The more risk you're willing to accept, the higher your chance of reward.
Mutual fund managers run a variety of funds that take greater or lesser risks to suit different style of investors.
Mutual Funds are Administered by a Manager
This is an important thing because it is one of the benefits while simultaneously being one of the drawbacks of mutual fund investing.
The downside to having a hands-on manager of a mutual fund is that it costs you.
The manager of a fund has to, of course, get paid for their services.
The payments that are going to the manager in return for looking after the mutual fund are slowly eating away at your potential profits.
On the other hand, you might actually make a profit! One of the biggest pitfalls that brand new investors fall into is trying to do only self-directed investing.
The problem with that is unless you've had extensive education in the area, you tend to not understand how to diversify yourself correctly to insulate yourself from loss.
You also don't know much about how to maximize your growth opportunities.
When you make a mutual fund investment, it is the manager's business to know the answers to those questions instead.
There are Different Types of Mutual Funds
Not all mutual funds invest only in stocks. Some also invest in bonds instead.
These types of mutual funds are also sometimes referred to as a fixed-income mutual fund, because the fund is constantly generating income through the interest generated on the bonds.
Net Asset Value
The price that you will pay for one share in a mutual fund is often indicated as the NAV, or net asset value.
This indicates how much the fund has in assets, after any applicable liabilities are accounted for.
Just like the price of a stock, the NAV can go up and down on a daily basis depending on what is happening within the portfolio, and on how much shares in the mutual fund are changing hands.
Mutual Funds Focus on Short Term
This is important to realize before you start mutual fund investing.
The managers of these funds are very much focused on their short-term goals.
They need to do everything in their power to boast a high annual rate of return, because this is what helps make sales and keep them in business.
However, this leads to certain types of risk taking that isn't necessary when you make other, more stable long-term investments.
If you're in it for the long haul, there are other ways to invest your money that are more in line with long-term thinking.
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