Crash Course: Mutual Funds for Beginners

by Kristina on May 14, 2015 · 1 comment

mutual funds, investing, investments

If you’re thinking about investing there are a ton of options out there on the market.  The choices of where, when and how to save your hard earned money can be overwhelming.  The key to being successful at investing is to start simple.  You don’t want to rush into something if you’re not comfortable and trust me your investment style will become more sophisticated over time.

Investing is like any other high, it’s addicting.  As you learn more about your options and how the market works you’ll go from getting your quarterly account statement in the mail to watching your money on a daily basis.  That’s how it works.  It’s just like losing weight, gambling or any other addiction – the more you do it, the more obsessed you become.  Just remember start small and let your taste grow naturally over time.

If you’re thinking about starting to invest mutual funds is a good place to start and here’s why:

They’re an easy option for beginners

As a financial planner I think mutual funds are a good place for beginners to start investing because they are an all inclusive option.  Mutual funds are a pooled investment, this means everyone who wants to buy the fund puts their money together and the fund manager invests it collectively as per the funds objectives.

Investors don’t have to worry about picking and choosing individual investments such as stocks, bonds and precious metals.  One single mutual fund can give you access to several different investments.  Mutual funds also give you access to individual investments you may otherwise not be able to buy due to minimum purchase requirements.

The costs are known upfront

Every mutual fund comes with a Management Expense Ratio, commonly known as an MER.  When you’re looking at fund fact sheets (which I’m sure you will start to read frequently) and deciding whether to buy a particular fund the cost of the fund is very important.  Wouldn’t you agree?  Before you buy something you want to know how much it costs

The MER is the pay check for the fund manager and other expenses related to the costs of operating a mutual fund such as administration fees etc.  It’s a percentage of the total assets under management in the fund.  If the fund has $10 billion invested and the MER is 1.75% that means the fund management company is taking 1.75% of $10 billion for operating expenses.  The more sophisticated the fund, the higher the MER.

It’s important to know that the MER percentage is removed before your published rate of return.  If you see a fund made 7% last year, that’s the amount investors actually received net of the MER.

Mutual Funds are extremely liquid

This is a major advantage of mutual funds.  In most cases mutual funds can be sold and investors will have the money within 1 to 3 days.  Mutual funds do not trade by the minute like stocks do, they sell at the day’s closing price set at 4 pm EST when the market closes.  Whether you sell your mutual funds at 10 am or 2 pm you will receive the same closing price of the day.

Have I convinced you that mutual funds for beginners are a good investment option?  The diversity, no hidden fees and ability to sell at any time make mutual funds a very attractive investment option.

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