How to Invest in Mutual Funds

Checking Financial Stock Charts on Smartphone in Busy City Street
•••

d3sign / Getty Images

Fortunately, if you want to learn how to invest in mutual funds, 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 type for beginners, because they are diversified and straightforward, which means that investors of all kinds can be successful without a lot of skill, time, or money.

Key Takeaways

  • When you first look at buying a mutual fund, do your best to relax, save money, and keep your investment strategy simple.
  • There are several types of funds that are excellent for beginner investors.
  • The first things to decide on are why you are investing, how much time you need, and your risk tolerance.

How Mutual Funds Work

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, 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 choose a mutual fund to purchase, 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. However, your options broaden significantly when you have at least $3,000. Try to build your investment funds to at least $1,000 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 many 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 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). 
  • Start with one of the best no-load fund companies: There are numerous good no-load fund companies, but two of the best are Vanguard and Fidelity.
  • Use one of the discount brokerage firms: Discount brokers like Schwab and TD Ameritrade 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 assuming you are a long-term investor), you may consider using an S&P 500 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. That is called your "investment objective." To discover what your investment objective is, ask yourself the following questions:

  • 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 its 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 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. 

If you are not comfortable doing it yourself after taking these steps, look into meeting with an investment advisor.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.