Mutual funds are supposed to make inventing easy, but picking and managing mutual funds is bewildering for most novice investors. Fortunately, you don’t have to know a great deal about investments to make money in mutual funds. All you need is a reasonable knowledge of your own financial situation and goals, and some basic guidelines for picking the right funds and avoiding major mistakes.
You don’t have to be rich to invest in mutual funds. As a matter of fact, most mutual fund shareholders are not rich. The median household income is $50,000, which means one-half of shareholders have income below that amount. Some mutual funds will allow you to invest $50 a month or less, so you can build a substantial portfolio over time at a reasonable cost.
The concept of mutual funds is fairly simple. A mutual fund is a pool of money from investors with goals similar to yours; this money is invested by the mutual fund manager or investment committee. You buy shares in the mutual fund, and then sit back and leave the rest to the experts, who invest your money in stocks or bonds of many different companies or government entities
To become a successful mutual fund investor, simply follow this five step blueprint:
Understand your risk profile and identify your financial goals and investment time horizon. It is important to know whether you are a Defensive, Easygoing or Daredevil investor by nature, and whether your timetable means you should invest as a Conserver, a Builder, or a Striver.
Select the right asset allocation based on your risk profile, financial goals, and time horizon. Once you’ve identified your risk profile and timetable, your can choose the right investment mix for you from the nine investment profiles.
Research funds that fit that mix, select the right funds for you, and invest. You can select your own mutual funds, or ask a stockbroker or financial adviser to help you make the right choices.
Keep track of your mutual funds, and add to them regularly. The amount and frequency with which you add to your investment is a greater factor in growing your money than the actual return on your investment.
Assess your funds’ performance, and modify your investments periodically. If you choose your funds carefully, you will need to review your funds only once every six months, or even just once a year.
Whether you are an investor just starting out, or an experienced investor who wants to know more about tailoring mutual funds to your own risk profile and investment timetable, this five-step blueprint should provide the important next step on your path toward financial security.