Avoid 12b-1 Mutual Fund Fees
A 12b-1 distribution fee with a mutual fund is the fee you contribute to the mutual fund's advertising campaign. Not all mutual funds charge 12b-1 fees. Mutual funds that do charge 12b-1 fees don't perform any better than those that don't, so look for a fund that doesn't charge this fee. You can find this important bit of mutual fund information in the mutual fund prospectus.
Real Estate Mutual Funds (REITs)
If you want a piece of the real estate action, but donĄ¯t have enough money to buy a rental unit or invest in another property, look into Real Estate Investment Trusts (REITs). These special mutual funds only invest in property. Some specialize in rental units, while other buy only commercial properties. Over time, investing in real estate tends to yield slower profits than investing in the stock market, but investing in tangible objects can give you a greater sense of security. Plus, REITs give you several other mutual fund benefits including the ability to quickly build a diverse portfolio with little investment.
Getting Mutual Fund Information
Every mutual fund has a prospectus that you can request in order to get mutual fund information. A prospectus is a package of materials that tells you about fees associated with the fund, the objectives of the fund, and the individual stocks that are held by the fund. Request a prospectus through your mutual fund broker before you invest in any mutual fund.
Investing in Index Funds
When in doubt, invest in index funds. Index funds are mutual funds that hold a little bit of all the stocks in a particular index. S&P 500 Index Funds are offered by all good brokers and require little effort on your part. Whenever the S&P 500 goes up, you know that your mutual fund has gone up as well. Because most mutual funds donĄ¯t beat the market over time, investing in an index is the easiest way to invest in the stock market even if you're still learning the mutual fund basics.
Socially Responsible Mutual Funds
If you want to invest your money in a cause you believe in, look into socially responsible mutual funds. These mutual funds only buy into companies that support the ideals of the fund manager. Not all socially responsible mutual funds are alike, however. Some focus on investing in companies that they feel treat workers fairly. Others look for companies that benefit the environment (and all have different standards for how they evaluate this). While socially responsible mutual funds donĄ¯t have a greater success rate than other types of mutual funds, they can be worth it if you are looking for a way to use your money to promote your values. Look through a prospectus for the socially responsible mutual funds you are interested in to find mutual fund information about the values of the fund. On the other side of the coin, there are also vice mutual funds available for those who want their money to support Ą°vicesĄą such as alcohol or fast food. These also donĄ¯t perform any better than other funds in the long term.
Mutual Fund Basics
Learn some mutual fund basics before you invest. Mutual funds contain stocks or bonds from many different companies. When you buy into a mutual fund, you are buying a part of each stock the fund owns. The many mutual fund benefits make them a popular product. Because some mutual funds require very little to begin ¨C some as low as $500 to start ¨C they make investing accessible to those who donĄ¯t have a lot to stash away. Also, because so many companies are represented in each mutual fund, you are less likely to be affected dramatically if one of the companies doesnĄ¯t do well. The others can often even things out.
Load vs. No-Load Mutual Funds
A mutual fund load is the amount of money you are charged to buy the mutual fund through a broker. A front-end load is paid when you buy the mutual fund. A back-end, or deferred load, is paid when you sell. If a mutual fund has no load, you are buying it directly. Loaded funds don't perform any better than no-load funds, so stick with mutual funds that don't charge a load. You'll get all of the same mutual fund benefits without the extra fees.
Actively vs. Passively Managed Funds
Actively managed mutual funds are run by a person or team of people who can research each company in depth and fly out to the headquarters to inspect every detail of the company's operations. Passively managed funds are often run by computers that either hold onto companies indefinitely or shuffle them around according to pre-set standards. Before you decide in favor of actively managed funds, consider that all of the research and management time put in by the managers of an actively managed fund is charged to you in the form of fees. Add on to that the fact that a majority of actively managed funds don't perform better than a passively managed S&P 500 Index fund and you'll start to wonder why anyone invests in actively managed funds at all. Although there have been and continue to be a few great mutual fund managers, for the most part it's better for those interested in mutual fund basics to stick with a passively managed index fund.
ETFs
If you have a large sum of money that you want to invest in a mutual fund, look into Exchange-Traded Funds (ETFs). ETFs contain many stocks like mutual funds but can be bought and traded directly like stocks. The benefit of ETF investing are similar to mutual fund benefits. You get exposure to a large segment of the market for relatively low maintenance fees. You only pay the charges associated with buying and selling the stock ¨C which can be pretty low if you go through an online discount broker. ETFs are not appropriate for investors planning on adding to their portfolio in small contributions over time. This investment strategy, called dollar cost averaging, when paired with ETFs will rack up more fees every time you invest and reduce your overall gain.