Do you know how to invest in mutual funds? The right way? Buying mutual funds correctly can help your portfolio grow bigger, faster and with less stomach-churning ups and downs as markets fluctuate.
To find the right way to invest in mutual funds, brush up on your understanding of how these investments work and what their purpose is.
How To Invest In Mutual Funds: What Is A Mutual Fund?
Mutual funds are still the dominant way people participate in the financial markets, especially in retirement accounts like 401(k)s and IRAs. Nearly 100 million U.S. investors owned mutual funds in 2018, says The Investment Company Institute. And 43.9% of U.S. households, or 56 million, owned mutual funds.
Mutual funds are appealing as they make owning investments easy. These funds typically hold many individual stocks, bonds, cash or a mix of those. The share price of the mutual fund itself, or net asset value, goes up or down each day. The price of a mutual fund changes depending on whether prices of the stocks and bonds it owns rise or fall.
Growth-oriented mutual funds own shares of companies expected to increase profit. Income-oriented mutual funds own investments that may not grow as rapidly, but routinely pay cash to investors.
How Is A Mutual Fund Run?
One or more portfolio managers run each mutual fund. A fund is passively managed if the manager only buys securities that are part of a list known as an index. The S&P 500 Index is a cross section of the stock market’s big, well-known stocks.
A fund is actively managed if the manager’s job is to pick stocks for some strategic goal instead, such as aiming for stocks whose share prices are expected to rise more than an index. Other reasons include an attractive dividend or interest payment.