Mutual Funds Tips
Read these 6 Mutual Funds Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Investing tips and hundreds of other topics.
ETFs
If you have a large sum of money that you want to invest in a mutual fund, look into Exchange-Traded Funds (ETFs). ETFs contain many stocks like mutual funds but can be bought and traded directly like stocks. The benefit of ETF investing are similar to mutual fund benefits. You get exposure to a large segment of the market for relatively low maintenance fees. You only pay the charges associated with buying and selling the stock – which can be pretty low if you go through an online discount broker. ETFs are not appropriate for investors planning on adding to their portfolio in small contributions over time. This investment strategy, called dollar cost averaging, when paired with ETFs will rack up more fees every time you invest and reduce your overall gain.
Investing in Index Funds
When in doubt, invest in index funds. Index funds are mutual funds that hold a little bit of all the stocks in a particular index. S&P 500 Index Funds are offered by all good brokers and require little effort on your part. Whenever the S&P 500 goes up, you know that your mutual fund has gone up as well. Because most mutual funds don't beat the market over time, investing in an index is the easiest way to invest in the stock market even if you're still learning the mutual fund basics.
Socially Responsible Mutual Funds
If you want to invest your money in a cause you believe in, look into socially responsible mutual funds. These mutual funds only buy into companies that support the ideals of the fund manager. Not all socially responsible mutual funds are alike, however. Some focus on investing in companies that they feel treat workers fairly. Others look for companies that benefit the environment (and all have different standards for how they evaluate this). While socially responsible mutual funds don't have a greater success rate than other types of mutual funds, they can be worth it if you are looking for a way to use your money to promote your values. Look through a prospectus for the socially responsible mutual funds you are interested in to find mutual fund information about the values of the fund. On the other side of the coin, there are also vice mutual funds available for those who want their money to support “vices” such as alcohol or fast food. These also don't perform any better than other funds in the long term.
Real Estate Mutual Funds (REITs)
If you want a piece of the real estate action, but don't have enough money to buy a rental unit or invest in another property, look into Real Estate Investment Trusts (REITs). These special mutual funds only invest in property. Some specialize in rental units, while other buy only commercial properties. Over time, investing in real estate tends to yield slower profits than investing in the stock market, but investing in tangible objects can give you a greater sense of security. Plus, REITs give you several other mutual fund benefits including the ability to quickly build a diverse portfolio with little investment.
Actively vs. Passively Managed Funds
Actively managed mutual funds are run by a person or team of people who can research each company in depth and fly out to the headquarters to inspect every detail of the company's operations. Passively managed funds are often run by computers that either hold onto companies indefinitely or shuffle them around according to pre-set standards. Before you decide in favor of actively managed funds, consider that all of the research and management time put in by the managers of an actively managed fund is charged to you in the form of fees. Add on to that the fact that a majority of actively managed funds don't perform better than a passively managed S&P 500 Index fund and you'll start to wonder why anyone invests in actively managed funds at all. Although there have been and continue to be a few great mutual fund managers, for the most part it's better for those interested in mutual fund basics to stick with a passively managed index fund.
Avoid 12b-1 Mutual Fund Fees
A 12b-1 distribution fee with a mutual fund is the fee you contribute to the mutual fund's advertising campaign. Not all mutual funds charge 12b-1 fees. Mutual funds that do charge 12b-1 fees don't perform any better than those that don't, so look for a fund that doesn't charge this fee. You can find this important bit of mutual fund information in the mutual fund prospectus.
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| Tammi Reynolds |
