Getting Started with Investing
Investing begins before you buy your first mutual fund (or before purchasing the next fund). If you are investing independently without a financial advisor, ask yourself some questions: What do you hope to achieve through your saving? Are you hoping for a secure retirement? To accumulate wealth to enhance your financial security? What is your time frame? Is it one year? Five years? Ten years?
Basic Types and Categories of Mutual Funds
Mutual funds are organized into categories based on asset class (stocks, bonds, cash) and then further classified by style, objective, or strategy. Knowing how mutual funds are categorized helps in selecting the best funds for asset allocation and diversification purposes. For example, there are mutual funds in stocks, mutual funds in bonds, and mutual funds in money market. Equity and bond funds, as basic fund types, contain many subcategories that accurately describe the investment style of the fund.
Understanding Your Risk Tolerance
Before selecting funds, it is important to know your risk tolerance – a measure of the level of volatility (ups and downs) or market risk you are willing to expose your portfolio to. If you are just starting to invest in mutual funds, or if you feel very anxious when your account drops by 10 percent (to $9,000) over a year, your risk tolerance is relatively low – perhaps not suitable for high-risk investments. You might consider starting with a balanced or “hybrid” fund. If you are more experienced in investing or have some money you can “play with” for a while, a more aggressive approach may be suitable for you.
Determining the Right Asset Allocation
Once you determine your risk tolerance level, you should consider the desired asset allocation – a mix of investment assets (stocks, bonds, cash) that make up your portfolio. An appropriate asset allocation will reflect your risk tolerance level: an aggressive investment (high risk tolerance), a moderate investment (medium risk tolerance), or a conservative investment (low risk tolerance).
Selecting the Best Funds
With thousands of mutual funds to choose from and hundreds of different fund companies offering them, having so many options can lead to unnecessary decision-making. Undoubtedly, no-fee funds are the best choice for mutual fund investors. Once you have determined your asset allocation, start selecting the best mutual funds for you and your investment goals. When choosing from a wide range of mutual funds, start by using a fund screening tool or comparing performance against benchmarks. Also, look at other important characteristics of mutual funds, such as fund fees and expenses (expense ratio) and manager tenure. Most importantly, ensure you select a diverse range of funds that fit your risk tolerance and investment goals.
Building Your Portfolio
Building a portfolio of mutual funds is similar to building a house: there are various strategies, designs, tools, and materials available that can be applied; however, every structure shares some fundamental features. To build the best mutual fund portfolio, exceed the wise advice of “don’t put all your eggs in one basket.” Building a structure that can withstand the test of time requires smart design, a strong foundation, and a simple set of mutual funds that work well for your needs.
Tax Basics for Mutual Funds
How can taxes on mutual funds be minimized? What type of fund is best for taxable accounts? Why did you receive a 1099? Understanding taxes related to mutual funds will help maximize your overall investment returns by being a smarter investor. As the saying goes, “nothing is certain in life except death and taxes.” However, taxes can be minimized or even avoided in relation to investing in mutual funds. Basic knowledge and practice in mutual fund taxation enable increasing your overall investment portfolio returns.
Avoiding
Dave Ramsey’s Mistake
Dave Ramsey is a good entertainment personality and seems like a really nice person. However, when it comes to mutual funds, his investment philosophy crosses dangerous boundaries. Some good investment tips on mutual funds can be gleaned from his radio show, but any wise investor should understand the difference between entertainment and sound investment practices.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and credibility of our content.
Source:
Internal Revenue Service. “Mutual Funds (Costs, Distributions, etc.).”
Source: https://www.thebalancemoney.com/best-tips-on-mutual-fund-basics-2466563
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