Basics on How to Invest in Mutual Funds

Taking the First Steps With Investing

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Grow your money by learning how to invest in mutual funds. Getty Images

If you want to learn how to invest in mutual funds, fortunately there's only a handful of key points to know before you get started. Although mutual funds are used by investment advisors and professional money managers all over the world, mutual funds can be the best investment types for beginners because they are simple and diversified, which means investors of all kinds can be successful without a lot of skill, time or money.

What Is a Mutual Fund?

A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings combine to form one mutual fund, also called a portfolio.

Before You Buy a Mutual Fund

Before you buy a mutual fund, you will need to spend a little time learning the basics and studying a guide of best practices for investing in mutual funds. Success in almost anything and everything you seek to accomplish begins with knowing what to do and knowing what not to do.

  • Don't stress: Investing with mutual funds is much easier than you think. The hardest part is just taking the first step.
  • Save money: There are thousands of mutual funds in the universe but very few allow investors to get started with less than $1,000. Your options broaden significantly when you have at least $3,000. So build savings to at least $!,000 before shopping for mutual funds.
  • Keep it simple: Don't make things more complex than they need to be. The most experienced (and honest) investors will tell you that you don't need any exotic investments or a large number of mutual funds to be successful.

Consider the Best Funds for Beginners

Choosing the best mutual funds for beginners is not a matter of finding the best performers of the day.

Instead, beginners are wise to know their investment objectives and future plans and prepare for a long-term strategy.

  • Buy No-load funds: A no-load fund is a fund that does not charge a load, which can be either a commission (front-load) or a contingent deferred sales charge (CDSC or back-load).  If you don't have an advisor, there's no reason to pay any kind of commission to invest.
  • Start with one of the best no-load fund companies:There are many good no-load fund companies but two of the best are Vanguard and Fidelity.
  • You can also use one of the discount brokerage firms: Discount brokers like Schwab and Scottrade can be a smart, low-cost way for investors to gain access to thousands of different mutual funds.
  • Consider S&P 500 Index Funds: To keep things simple, and to assume you are a long-term investor, you may consider using an index fund that invests in hundreds of the largest companies in the United States. You can always add to your portfolio later for more diversification.

Determine Your Investment Objective and Start Investing

Before you invest, it is smart to know why you're investing. This called your investment objective. What is the purpose of your money? What do you want it to do?

How much time do you have until you need this money? How much risk are you willing to take to achieve above-average returns? Do you want your money to grow or do you want to preserve it's current value?

The answers to these questions will help you arrive at your investment time horizon and risk tolerance, which are the fundamental elements of determining your investment objective.

Once you've taken all of the above steps, you'll simply contact the mutual fund company of your choice and select your first fund. You can do this easily on the Internet or you can call a toll free number and speak to a representative. 

After taking these steps and you are not comfortable doing things yourself, you can take a look at this link on the types of investment advisors.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.