Are Mutual Funds a Good Investment Option?
Whether you’re a new or seasoned investor, you’ve probably heard about mutual funds. Here’s a quick guide to everything you need to know about mutual funds.
What is a Mutual Fund?
A mutual fund is an investment vehicle that pools money from multiple investors to build a diversified portfolio of stocks, bonds, or other assets, professionally managed by a mutual fund manager. Mutual funds allow investors to own a small piece of several assets instead of investing in a single stock, bond, or other asset.
Benefits of Mutual Funds
When you buy a mutual fund, it’s often a simple and inexpensive way to gain access to a variety of assets. But what are some of the benefits?
- Diversification. Spreads your money across many securities (stocks, bonds, other assets), reducing the risk of a single investment failing.
- Professional Management. Fund managers handle research, asset management, and portfolio monitoring with the intent to provide a solid return on investment.
- Liquidity. Similar to other stock market investments, you can typically buy or sell mutual fund shares once per day.
- Accessibility. Many funds have low minimum investment thresholds, making them accessible and somewhat “beginner-friendly.”
How to Invest in Mutual Funds
If you want to invest in mutual funds, here are some things to consider:
Active or Passive
Mutual funds come in two distinct varieties, actively or passively managed.
- Active. Managed by professional fund managers who try to outperform the market or a specific benchmark index (like the S&P 500) by researching, selecting, and frequently adjusting investments. Their decisions are based on analysis, forecasts, and market trends.
- Benefits
- Potential for higher returns than the market average.
- Managers have the flexibility to react to market shifts or opportunities.
- Downsides
- May carry more risk from concentrated bets or poor decisions.
- Higher fees (due to active management and trading).
- Performance doesn’t always beat the market, especially after fees.
- Passive. Managed by professional fund managers who simply try to match the performance of a specific market index, not beat it by holding the same securities in the same proportions, and limited trading by fund managers.
- Benefits
- Lower fees and expenses.
- Typically more tax-efficient.
- Historically outperformed many active funds over the long term.
- Downsides
- No chance to beat the market—just track it.
- Limited flexibility during market downturns or volatility.
Consider Your Budget
When investing in mutual funds, consider how much you can afford.
- Mutual funds typically have a minimum investment amount, sometimes ranging from $100 to $3,000.
- Once you hit that minimum, you can decide to invest as much or as little as you want.
Be Aware of Fees
No matter which investment route you pick, you will be charged an annual fee for fund management. These fees, based on a percentage of the cash you invest, are called an expense ratio.
A fund with a one percent expense ratio will charge you $10 for every $1,000 you invest.
Do One Thing: Consider mutual funds as a way to build your long-term savings.
*Fortera’s Wealth Management Team is here to help you build a strong financial foundation. Providing members with smart, customized retirement solutions, Fortera partners with Osaic Institutions. Our licensed and experienced Financial Planning team, registered representatives of Osaic, offers impartial, thoughtful advice tailored to your unique journey and goals. We're here to help you navigate big life decisions with confidence and get started building a bright future. Visit our Financial Planning page to learn more or give our Wealth Management staff a call at 931.431.3315.
Original article by Chris O'Shea and adapted in partnership with SavvyMoney. This information is for educational purposes only. It is not intended to be investment guidance or advice. Consult with a financial advisor for investment guidance based on your situation.
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