If you’re seeking advice about how to invest your money in mutual funds, here’s the critical information you need, including which mutual funds to invest in and how to do so.
“Many financial innovations such as the increased availability of low-cost mutual funds have improved opportunities for households to participate in asset markets and diversify their holdings.”
Once you know you want to park some (or much) of your money in mutual funds, you’ll likely be wondering just where to invest — which mutual funds to invest in. Here’s some advice and information about mutual funds, including how to find the top ones, for the best results.
Mutual funds — introductory information
Most of us are very familiar with the term “mutual funds,” but not everyone understands just what they are. A mutual fund is where many people’s money is pooled and then managed for them professionally — for a fee. If you’re not a stock market whiz, you will likely be happy to have your hard-earned dollars being managed by people who have studied finance and who have investing experience. Funds also offer instant diversification, as your assets will be spread across dozens or even hundreds of stocks and/or bonds or other securities.
A mutual fund’s collection of securities is its portfolio, and those who have invested in it are its shareholders. You can invest in a mutual fund directly through its company and very often via your brokerage account, as well. Most major brokerages offer access to hundreds, if not thousands, of funds. You can invest in funds through your existing IRA — and you can open an IRA through many mutual fund companies, too. Finally, 401(k)s also offer mutual funds as investment choices.
Which mutual funds to invest in — active or passive?
There are about 9,500 different mutual funds out there, plus more than 1,700 exchange-traded funds, or ETFs, which are similar beasts. That can be overwhelming, but it helps to understand that most of them fall into various categories.
First off, know that some funds are actively managed and others are passively managed. An actively managed mutual fund will typically have a team of professional money managers who study the universe of securities they might invest in, choosing the most promising ones. They decide when and how much to buy — and when to sell. Shareholders are paying for their expertise.
Passively managed funds, or “index funds,” on the other hand, require little professional tending. They’re based on existing indexes (generally stock or bond ones) and simply aim to hold the same components in the same proportion, to achieve the same returns (less fees). These funds have much lower average expenses and fees, and studies have found that over long periods, stock index funds tend to outperform the majority of managed mutual funds. According to the folks at Standard & Poor’s, for example, as of the end of 2016, fully 83% of all domestic stock mutual funds underperformed the S&P 1500 Composite Index over the past 10 years. And 85% of large-cap stock funds underperformed the S&P 500. Over the past 15 years, those numbers are 82% and 92%, respectively.