Mutual Funds | Sep 21, 2009 | 0 Comments

How to Invest in Mutual Funds – Beginner Series Part One

I’ve decided to start a whole series on the world of mutual fund investing. I see many people there asking how to invest in mutual funds, so here’s the first part in a series to answer that question. Today, we’ll start at square one by looking at the basics of what a mutual fund actually is.

While there are many sites out there that spout out information about investing, I’m finding a disturbing increasing amount of sites that are spreading incorrect and potentially financially hazardous “tips” out there like the gospel. It’s my goal to teach you about mutual fund investing throughout this series. I hope you enjoy it and find it a worthwhile venture.

By the way, I’d encourage to join the revised Financial Rebel newsletter feed. You’ll get quick updates when we add something important to the site and you’ll get commentary and information that might not be published.

Mutual Funds Investing – Basics

Ok, let’s get a great start out of the gate by breaking down the word “mutual fund.” In essence, a mutual fund is an investment vehicle with a specific purpose. When you invest in that fund, you’re investing in that purpose. As more and more people invest in the mutual fund, more capital becomes available for investment.

The fund manager and team are responsible for how the mutual fund goes about accomplishing its goals. For instance, they could reallocate the capital into bonds, stocks, money markets, etc. Additionally, they might have the fund setup with certain criteria for investments. For instance, one mutual fund my wife and I invested in years ago was fairly speculative. That mutual fund wouldn’t be putting a majority of its capital in “Blue Chip” companies. It was a high risk – high reward mutual fund.

Like buying stocks in a company, you end up becoming a shareholder of the mutual funds you invest in. You’re now a stakeholder.

Mutual Funds Benefits

You might be sitting there right now wondering if you should invest in stocks, bonds, mutual funds, ETFs, precious metals, everything or what.

While I like diversity, my wife became a real fan of mutual funds, because it simplified the process of investing to make money for her. Sure, I was here and could guide us, but she also wanted to do some investing on her own. And that’s why mutual funds were the perfect vehicle for her. Here’s why:

• Mutual funds allowed her to basically “turn over the money” to someone who knew what they were doing, so she didn’t have to spend countless hours daily trying to keep up on stuff.
• Mutual funds allowed her to instantly diversify according to her desired plans. For instance, she could take 60% of her capital and put it into a mutual fund designed to be rock solid, but grow like a turtle walking. She also could take say 10% and invest in a mutual fund that was all about growing like a wild fire.
• Rather than researching tons and tons of companies, she could research fund managers and mutual funds. Once the right combination was found, the game was basically over for now.
• Instant diversity is a beautiful thing. Mutual funds spread out their capital through multiple companies and options. If one company starts to dive, others can bring the overall capital right back.
• Mutual funds help make lining up investment actions and goals much, much easier, which is another plus for newer investors.

Closing Thoughts

You may have heard of names, such as Vanguard, T. Row Price, Janus, etc. These aren’t single mutual funds (like stock for example). They are companies that offer various mutual funds.

When researching mutual funds, look for solid “brand names” as they tend to produce good results.

In the next part of this series, I’ll talk about types of mutual funds, further benefits and risks, fund managers, no-load mutual funds and more. I hope to see you next time.