Beginners need to be wise in knowing their investment goals and plans and prepare for a long-term strategy. Therefore, if you intend to do this yourself, rather than using an advisor, it makes sense to know the mutual fund companies that have the best selection of low-cost funds that do not require paying broker commissions or sales fees. You can then move on to selecting the funds from there.
Why do low-cost funds work?
Low-cost funds are ideal for beginners as they are free of broker commissions and sales fees, collectively known as “expenses,” which are intended to pay for advisory services. If you are buying your mutual funds, it is assumed that you have already compared doing it yourself versus using an advisor and decided to go it alone with your mutual fund purchases. Hence, there is no good reason to pay expenses with high-fee funds, especially since low-cost funds often provide better returns than high-fee funds in the long run. In other words, if you are an investor who buys and holds assets and your investment goal (for example, retirement) is several years or more from now, you are more likely to achieve better performance with low-cost funds.
Use one of the best low-cost mutual fund companies
We assume here that you won’t just stop at one mutual fund, and your investment goals are long-term (more than five years). Therefore, you will want to consider the best low-cost mutual fund companies that offer a wide range of mutual fund types and categories because you will need to continue building your mutual fund portfolio to diversify it. Some of the best low-cost mutual fund companies include Vanguard Investments, Fidelity, and T. Rowe Price.
Why S&P 500 index funds can be better for beginners
S&P 500 index funds can be a great place to start building a portfolio of mutual funds. Most have extremely low expense ratios and can provide you with exposure to dozens or hundreds of stocks representing different industries in just one fund. Thus, you can achieve your initial goal of having a low-cost and diversified mutual fund. Again, Vanguard, Fidelity, and T. Rowe Price are good mutual fund companies for index funds. You might also consider Charles Schwab.
How to invest in just one fund
If you prefer the simplest method and want to invest a large amount in just one mutual fund, there are a few options that work best regarding keeping costs low and providing broad diversification:
Balanced Funds
Also known as hybrid funds or asset allocation funds, these are mutual funds that invest in a balanced distribution of stocks, bonds, and cash. The distribution typically remains fixed and invests according to a specific investment goal or style. For example, as of October 31, 2020, the Fidelity Balanced Fund (FBALX) had an approximate asset allocation of 67% stocks, 31% bonds, and 2% cash. This distribution is considered average risk or a moderate portfolio.
Target-Date Funds
As the name suggests, target-date funds invest in a mix of stocks, bonds, and cash that is appropriate for someone investing until a certain year. As the target date approaches, the fund manager will gradually reduce market risk by shifting assets from stocks to bonds and cash, which is what an individual investor does manually. Therefore, target-date funds are a type of “set it and forget it” investment.
On
For example, if you are saving for retirement and believe you may retire around 2035, the right choice for you might be the Vanguard Target Retirement 2035 Fund (VTTHX). After that, you can finish your research, periodically add new funds to the fund, and watch your money accumulate while you continue with your life!
How to Analyze a Mutual Fund
You can find out everything you need to know at one of the best mutual fund research sites. But before you start your search, you’ll want to know the features you’re looking for and how to analyze a mutual fund. Analyzing the fund includes more than just past performance. As you know, you’ll want to look for funds with low fees and expenses, which can increase the odds of acceptable future returns.
These features are particularly important for index funds, which are also called passive management funds because the fund manager does not try to “beat the market” but instead tries to match an index (in a passive way). There are also actively managed funds, where the fund manager actively seeks to achieve the best returns for a reasonable level of risk. These funds will, of course, have higher cost ratios because the additional research required increases the fund’s management costs. With actively managed funds, you’ll want to check how long the manager has been at the helm to ensure that the manager has been in charge for at least three years, hopefully five years or more.
Continuous management is a guarantee that a fund’s performance is attributable to the current manager rather than someone else who retired recently or left the fund company to manage a different fund.
How to Build a Portfolio of Mutual Funds
Before buying your first mutual fund, it’s wise to understand how to build a portfolio of mutual funds. This research goes back to the first point of knowing your long-term plans for investing and basing your mutual fund purchase on that plan. You can think of it like drawing and reviewing a house plan before building its foundation.
Above all, keep things simple and make sure not to overthink or overanalyze mutual funds. Sometimes, just getting started is the best idea. The details can work themselves out later. Waiting too long to invest will start undermining your investment goals.
Source: https://www.thebalancemoney.com/best-mutual-funds-for-beginners-2466565
Leave a Reply