10 Things to Know About Mutual Funds

By Arthur B. — Published March 04, 2018

10 Things to Know About Mutual Funds

Mutual funds can be a tricky business. Mutual funds have grown in popularity in the last two decades. They are now one of the most favored investment vehicles. A mutual fund is a means of investment that is made up of numerous funds from various different investors. As this is a rather promising investment scheme, we have to know the basics of investing in mutual funds and what that entails.

1. What exactly is it about?
Mutual funds are all about pooling in money from numerous small investors. The money can then be used to invest in securities like stocks, bonds, real estate, and short-term debts. People who invest in the mutual fund will then get his/her shares from the total investment.

2. Really diversified
Mutual funds are a mix of numerous investments into different industries, companies, and securities like bonds, equities, and debentures. It reduces the risk you take when you invest all your money in a single company. Mutual funds have a higher chance of producing profit in comparison to when you invest in a single industry, security or company. Although these odds are pretty good, the funds are really diversified. Which means that each dollar is broken down into cents and invested in different industries, depending mainly on the mutual fund’s objective. When you invest directly into the stock market, you can see where your money goes. That’s not the case with mutual funds.

3. Different equity funds
There are different kinds of funds. Some of these funds are sector funds, index finds, and growth funds. Sector funds stick to certain sectors like healthcare or technology when buying shares of companies. Index funds are funds that buy shares of every single stock in a certain index. Growth funds only buy shares of flourishing companies.

4. There are a variety of different flavors that are available for bond funds
There is a fund that suits everyone’s tastes. Liquid funds are a good option for when you only want to invest your money for a month. Ultra-short-term funds can be used for when you want to invest your money for a short period of time - less than six months. If you’re comfortable with investing for more than a year, then the short-term funds are a good option for you. You get to choose a debt fund according to your specific time horizons.

5. There are certain risks you should consider
Achieving returns can be risky. Always consider the risks that are involved in each fund’s investments before you buy it. If you’re not big on taking risks, then it’s wiser to stick to the funds that have lower risks involved.

6. Low expenses are of optimum importance.
Mutual funds require you to pay a percentage of the total amount of assets so that it can make profits and cover its expenses. Although it may not sound like much at a few percentage points on an annual basis, they could create a significant performance drag after some time.

7. Taxes
Taxes can take a lot out of your performance. If you don’t sell your fund shares, it might lead to you being stuck with severe taxation. Investors are often surprised to find out that they do, in fact, owe taxes for both dividends as well as capital gains.

8. Never hunt for the winners
When you’re choosing a mutual fund to invest in, always hunt for those that hold promise for the future. These are the ones that tend to be consistent. Funds that rank high for a long period of time usually don’t finish that way in the long run.

9. Diversified equity funds are a good foundation for your long-term portfolio
Diversified equity funds are those that invests in a wide range of sectors. Diversified funds tend to provide more risk-adjusted returns in the long run when compared to all the other investment asset classes. Long-term portfolios that have equity funds as a foundation tend to be really strong.

10. Don’t rush in throwing away funds
All funds have their hour of doom. Not unlike the saying, “every dog has its day”. Sometimes they get better. Consider your options really carefully before selling off your shares.

Always have at least a basic understanding of what you’re getting yourself into before you start investing or you might find yourself in deep waters without a life jacket.

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