A mutual fund is like a bucket full of multiple different stocks, bonds, securities or a combination that you invest in collectively. When you buy into a mutual fund, you are buying into all of the securities in the fund by making one single investment. It is a great way for instant diversification.
Types of Mutual Funds
There are stock funds, sector funds, passively-managed, actively-managed, load, no-load, money market funds, balanced funds and that’s just naming a few of them.
This may seem confusing, but if this seems more complicated than you would prefer, there is a simple rule that you can live by: Invest in index funds. It really is that simple. Historically, index funds have outperformed 80% of mutual funds.
More: What is an Index Fund?
Mutual Fund Fees
There are always fees associated with mutual funds, but they vary drastically. There are management fees and 12b-1 fees; the 12b-1 fees are charged by some funds to cover some of the overall costs of the fund. Load funds charge an upfront or a back-end load fee, which is just a sales charge that you either pay when you buy in (upfront) or when you sell the fund (back-end). No-load funds, however, do not have either of those fees.
Index funds tend to have the lowest fees of any of these funds, but if you do decide that you are going to try to beat the market and invest in one of the funds in the 20% that do outperform index funds, then the fees usually won’t matter as much to you.
Many times the funds with loads and higher fees are the funds that promise or at least attempt to beat the market, just make sure all of the high fees don’t outweigh the increased earnings.
How to Invest in Funds
There are many ways to invest in all kinds of mutual funds and index funds. You can generally invest through a brokerage company or a financial institution. Vanguard, for example, offers its own mutual funds and index funds, but you can also invest in other funds through a Vanguard brokerage account.
If you decide to invest in any fund, you should head over to morningstar.com to get performance information on any fund you choose. Many people choose funds based on past performance, which is a fairly reliable method to use, but if you are investing in index funds, it’s more about picking the right index to invest in, than the specific fund itself.