Investing in Mutual Funds Tip

 

 

 

Investing in Mutual Funds Tip # 1: How to Get Started Investing

Investing begins before buying the first mutual fund (or prior to buying the next one). If you are just getting started investing with mutual funds, you may want to try beginning with a balanced fund. You will also want to ask questions: What is it that you would like to accomplish with your savings? Do you have specific goals, such as saving for retirement, or do you have some broadly defined goals, such as the accumulation of wealth for the general purpose of strengthening your financial security? What is your time horizon? One year? Five years? 10 years?

Investing in Mutual Funds Tip #2: Know Your Risk Tolerance

Before choosing your funds, you need to have a good idea of how much risk you can tolerate. Your risk tolerance is a measure of how much fluctuation (a.k.a. volatility—ups and downs) or market risk you can handle. For example, if you get highly anxious when your $10,000 account value falls by 10% (to $9,000) in a one-year period, your risk tolerance is relatively low—you can’t tolerate high risk investments.

Investing in Mutual Funds Tip #3: Determine Your Asset Allocation

Once you determine your level of risk tolerance, you can determine your asset allocation, which is the mix of investment assets—stocks, bonds and cash—that comprises your portfolio. The proper asset allocation will reflect your level of risk tolerance, which can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).

Investing in Mutual Funds Tip #4: Review the Basic Types and Categories of Mutual Funds

 

 

Mutual funds are organized into categories by asset class (stocks, bonds and cash) and then further categorized by style, objective or strategy. Learning how mutual funds are categorized helps an investor learn how to choose the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories that further describe the investment style of the fund.

Investing in Mutual Funds Tip #5: Learn How to Choose the Best Funds

 

 

With thousands of mutual funds to choose from and hundreds of different fund families offering them, an investor can suffer from choice overload and possibly make needless mistakes. Without a doubt, no-load funds are the best choice for mutual fund investors.
Now that you know your asset allocation, you need to begin choosing the best mutual funds for you and your investment goals. If you have a broad choice of mutual funds you begin by using a fund screener or you may simply compare performance to a benchmark. You’ll also want to consider important qualities of mutual funds, such as fund fees and expenses (see the Expense Ratio), and manager tenure.

Investing in Mutual Funds Tip #6: Build Your Portfolio of Mutual Funds

 

 

Building a portfolio of mutual funds is similar to building a house: There are many different kinds of strategies, designs, tools and building materials; but each structure shares some basic features. To build the best portfolio of mutual funds you must go beyond the sage advice, "Don’t put all your eggs in one basket:" A structure that can stand the test of time requires a smart design, a strong foundation and a simple combination of mutual funds that work well for your needs.

 

 

Investing in Mutual Funds Tip #7: Know the Basics on Mutual Fund Taxation

 

 

How does one reduce taxes on mutual funds? Which types of funds are best for taxable accounts? Why did you receive a 1099? Understanding mutual fund taxation will help you improve your overall returns by being a smarter investor. As they saying goes, "Nothing is sure in life but death and taxes." However, taxes can be minimized or even avoided with regard to mutual fund investing. Therefore, with knowledge of the basics on mutual fund taxation, you will be enabled to increase your overall investment portfolio returns.

Investing in Mutual Funds Tip #8: Avoid the Dave Ramsey Mistake

 

 

Dave Ramsey is a good entertainer and seems like a genuinely nice person. However, with regard to mutual funds in specific, his investment philosophies are bordering on dangerous. Mutual fund investors can get some good tips from his talk radio show but they are wise to understand the difference between entertainment and sound investment practices.
Be sure to check out this article on what Dave Ramsey gets wrong with mutual funds.
Armed with just a handful of tips on mutual funds, investors can do well to build their own portfolios. But remember that mutual fund research, analysis and portfolio management is not for everyone. If you don't enjoy doing it, chances are you won't be good at it.