Mutual Funds: What Are They And Which One Is Right For Me?

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Know how to invest in a mutual fund, and understand the risks, benefits and everything else you need to know.

Do you have savings and are not attracted to the (low) profitability of savings accounts? A good investment alternative is a mutual fund. But first, let’s cover the basics:

1. How to invest in mutual funds?

A mutual fund collects money from investors,pools them together, and then  invests in a diversified range of instruments. Mutual funds invest in stocks, bonds and other assets. You can open a mutual fund with any of the large commercial banks such as Vanguard, Fidelity, eTrade, Scottrate etc..

2. What types of funds are there?

There are several types of funds, which are classified according to the risk profile of the investor. Each variety of fund has a different composition of assets.

An aggressive fund (high risk) will put almost 100% in stocks. A moderate risk fund will have a smaller percentage in stocks and a greater share in bonds. Finally, a conservative profile will not consist of any equity (shares), but will solely be comprised of bonds. The rest will go to short-term instruments that have no volatility.

3. How do I define my investor profile?

There are three key points to consider: the ability to invest, the willingness to invest, and the timeframe for which my goals are set. You ultimately need to determine how much you want, and how much risk you can tolerate.

Capacity refers to the economic position of the person. If you have accumulated wealth: properties, good and stable income flow, then you are more likely to be able to take on additional risk. In other words, if you already have a lot of money, then you are generally going to be less risk averse, and more open to the possibility of losing(or gaining) a lot of money. Finally, the horizon of investment refers to the objectives that I seek to achieve with my savings. For example, if I want to save to pay for the education of my children, I will have a longer horizon.

4. Which fund suits me?

If the person has a long investment horizon and is willing to tolerate risk, stock (aggressive) funds are perfect. They are the ones that have the best performance, but it’s recommended that you invest for at least five years to see good results.

However, if the thought of losing any money absolutely terrifies you, then you have a lower risk tolerance and would be better off investing in a conservative mutual fund. A”10 year” treasury for example. It’s recommended to keep these funds for about two years. If you cannot tolerate any type of volatility, you should go to a conservative or extra conservative fund, which will yield little, in terms of interest and potential upside, but they are far more stable and secure.

These are just the basics and they only scratch the surface. There is far more to learn about mutual funds, and a detailed analysis of a potential fund should be undertaken before investing. Any mutual fund worth their salt will have investment advisors ready to answer any detailed questions, but at least now you will be equipped with a baseline understanding of mutual funds.

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  1. Pingback: Five keys to choosing the best mutual fund. - My Financial Wisdom

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