How to Invest in Mutual Funds

Regardless of the size or goals of your investment portfolio, adding mutual fund holdings can help you diversify your investments while maintaining a low cost structure and a focused investment target. Investors of all sizes and skill levels can benefit from learning how to invest in mutual funds.

Steps

1. Select the financial institution you plan to use for purchasing mutual funds by carefully researching and asking for referrals from friends and family who regularly invest their money in the market.
   
   • Online investment firms typically have competitive fee structures and varied fund selections for investors willing to take a do-it-yourself approach to investing in mutual funds. This will require you to complete your own research and carefully monitor the performance and allocation of your mutual fund holdings. Many online investment management firms have helpful tools and guidance sections for beginning investors.
     
   • If you have a more sizable portfolio, you may prefer to have the guidance of a professional. Payments to fee-only Financial Advisers typically are in the form of an hourly or retainer basis, or a percentage of assets managed. Choosing this option will alleviate the burden of self-selecting and monitoring each of the mutual funds in your various accounts.
     
   • Banks and credit unions also sometimes offer mutual fund purchasing capabilities. However, they often charge higher fees and/or commissions than fee-only advisers, while providing a rather limited selection of mutual funds available for purchase. Some banks only allow customers to purchase funds in their own investment family.
     
2. Determine the risk tolerance with which you are comfortable and willing to accept for your investments.
   
   • Mutual funds will range in risk level from very conservative to highly risky. You should develop a diversified basket of mutual funds which meets your preferred level of risk. Visit financial websites where you can find a risk assessment for each mutual fund, usually on a scale from 1 to 5.
     
   • Even if you are a conservative investor, you may want to add at least a small portion of riskier mutual funds to ensure that your overall portfolio will be able to experience growth in addition to preservation of capital. Refrain, however, from putting all of your funds into highly-risky investments. Reserve at least a small portion (2 to 5 percent) in cash to take advantage of opportunities as they arise.
     
3. Practice overall diversification in your mutual fund investments, as this is essential to performance success.
   
   • While it might seem like a couple quality mutual funds will be enough to compose a portfolio, a properly diversified basket of investments will give you the best mix of growth and stability. Most advisers recommend having no more than 10 percent of your portfolio in any one particular asset class or mutual fund.
     
   • Your portfolio of mutual funds will have the best statistical probability of long-term success if you diversify your funds across many asset classes which are not correlated. This might include domestic stock funds, international stock funds, bond funds, and even specialty sector funds such as utilities or real estate. Spreading your money across asset classes will help your portfolio avoid being impacted by the movement of one particular industry.
     

Tips

• Mutual funds are offered in a variety of share classes, typically including A, B, C, and I classes. Each share class has a different fee structure including up-front sales charges, deferred charges, and 12-b1 (sales) charges. Your investment time line will help you decide the most appropriate share class.
  
• Some mutual funds also have short-term redemption charges, and generally charge a 1 or 2 percent fee for holding a mutual fund position for less than 60 days.