How to Invest in Mutual Funds

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Mutual funds are an easy way to invest in a broad portfolio of stocks, bonds, and other securities. You don’t need to spend a lot of time picking individual stocks and making trades. Just invest in a mutual fund, and the mutual fund takes care of managing an investment portfolio for you.

There are thousands of mutual funds to choose from that contain different investment portfolios and fund features. Here are the most important types of mutual funds to consider to find the right ones for your portfolio.

Equity funds

Equity funds invest in stocks. You can choose an equity fund that specializes in certain types of stock investments, such as U.S. stock, international stock, growth stock, or value stock. Another variation is the size of companies that are targeted by the fund. Small-cap funds buy stock of smaller companies, mid-cap funds buy stock in midsize companies, and large-cap funds buy stock in large companies. Some equity funds specialize in stocks from specific sectors of the economy such as finance, energy, or health care.

Fixed income funds

Also known as bond funds, fixed income funds invest in debt issued by local and national governments and by large businesses. Bond funds are typically considered a lower risk alternative to stock investments, but offer less growth potential.

Balanced funds

Balanced funds invest in a mix of stocks and bonds. Many investors want to capture the growth potential of stock investments and the lower-risk income from bonds. A balanced fund provides a simple way to cover both stock and bond investments in a single fund.

Index funds

Index funds are designed to track a broader market such as the S&P 500. The main advantage of index funds over equity funds is that they typically have very low fund expenses since index funds require almost no management. (See also: Why Warren Buffett Says You Should Invest in Index Funds)

Target-date funds

Target-date funds adjust their asset allocation mix over time, from more aggressive investments to more conservative choices as the target date approaches. These funds are usually named with a date that represents the retirement or target year that the investor expects to begin accessing the funds. For example, “Freedom 2035” would target the year 2035 to reach its most conservative investment position. (See also: Start Planning Now for When Your Target-Date Fund Ends)

How to select the best mutual funds

Once you have identified the best types of mutual funds for your investment goals, you will need to select the specific mutual funds you want to purchase. Some of the key criteria to consider when evaluating funds are:

• Investment objective: Do you want an aggressive growth fund that takes higher risks to seek higher returns, or would you rather have a more conservative fund that will be more likely to protect your investment?

• Active vs. passive management: Do you want a fund with a fund manager making trades to try to maximize returns, or a passive fund that simply tracks a segment of the market?

• Fees (expense ratio): Funds with lower fees are best for maximizing the growth of your investment over time, but some investment types are more complex and tend to have higher fees. Actively managed funds have higher fees than passive funds and index funds.

• Performance record (return): While past performance does not predict future results, most investors tend to select funds with returns that have performed well compared to similar funds over the past one to five years.

• Management team tenure: Some investors prefer funds that have had a consistent management team for a number of years.

You can do research to find funds that meet your investment objectives using online research tools at your stock broker’s website. Most brokers allow you to search for desired types of funds and review key information such as returns and fees. Some of the leading mutual fund brokerages include:

• Fidelity

• Vanguard

• Merrill Edge

• TD Ameritrade

• E*TRADE

• Charles Schwab

In case you don’t already have a broker, or if you want to check out a wider range of mutual fund offerings, here are some additional online mutual fund research tools to help you find and compare mutual funds:

• Wall Street Journal Mutual Fund Screener

• Maxfunds

• Morningstar

• Lipper

How to buy mutual funds

After you have done your research and have selected a mutual fund that you want to buy, there are two ways you can make the trade and buy into the fund through a brokerage:

• Execute an exchange to sell funds or stocks you currently own and use the proceeds to purchase the mutual fund you want to buy.

• Transfer cash funds to your brokerage to execute a trade to buy the mutual fund you want.

You may be able to achieve tax advantages if you purchase mutual funds as part of an IRA or 401(k) retirement plan. After you buy a mutual fund, you should monitor the performance of the fund, its fees, and whether or not the fund is still a good fit for your investment portfolio on at least an annual basis.

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