Your First Investment: How to Choose the Ideal Mutual Fund
If you’re a new investor and looking to get started with your first mutual fund, then congratulations – you’ve taken the first step towards financial freedom. But with more than 9,500 mutual funds to choose from, trying to screen for just one can be seem overwhelming.
It’s almost enough to stop you dead in your tracks before you get started. Don’t get discouraged just yet though, there’s an easy way to find the right fund for you. You only need to know a couple of key metrics and you’ll be building your first portfolio before you know it.
Mutual fund basics
A mutual fund is a great beginning investment for an investor at any age. These investment vehicles are like a basket of different assets all in one package. They often come with active management, as well, so holdings change over time to hedge against economic downturns and take advantage of growth opportunities. Mutual funds can also be started with small monthly investments, as well, making them perfect starter portfolios.
Mutual funds offer a lot of advantages to beginning investors and experienced investors who may just not have the time to manage their own investment portfolios. But not all funds are created equal. In fact, there are many different types of mutual funds that come with various risks and benefits. Not every fund is suitable or desirable for all investors.
The first consideration you need to address is what kind of fund you’re looking for. If it’s your first fund, you probably want something with active management and a diverse portfolio of holdings – nothing sector or region specific. Once you get started, branching out into international holdings and niche funds adds diversity to you portfolio, but for now, you want to focus on something you can build a portfolio around.
Depending on your risk tolerance, you may choose to invest in a stock-only fund or a fund that incorporates a mix of stocks and bonds. If you choose to be more aggressive and pick a stock fund, make sure it holds a diverse selection of assets – avoid funds that specify small-cap or mid-cap stocks. Those funds are riskier than large-cap funds and are more suited for investors who already have a portfolio growing.
One of the most important things to watch for is costs. Mutual funds come with various fees and expenses that can diminish your returns. A difference of half a percent doesn’t sound like much, but over a decade or longer, it can add up.
The last thing investors need to know about mutual funds is they can be offered as load or no-load funds. Load funds have share classes that charge a sales fee either up front or when you withdraw money from the fund. Investors should avoid these types of funds and concentrate only on no-load funds instead. Once you get your first fund started, you’ll be surprised at how quickly it can grow.