Guide to Mutual Funds: Pick the Growth Fund to Buy and Hold
Mutual funds are a growing and well-paying investment in countries like the US, Canada, China, Australia, and Japan. According to investment experts' mutual funds have assets worth $54.9 trillion as of 2019 globally. Thus, making it one of the best ways of investing is simple and works if you have a long-term financial goal.
Mutual funds you need to spend little time and less risky costs less, and you will get professional help.
So, in this guide, you will learn more about mutual funds.
What is a Mutual Fund?
A mutual fund is a collective investment scheme that involves capitalizing your money with other investors' capital to highly reduce investment risk. Expert money managers supervise this investment fund.
Benefits of Mutual Funds: Why Should I Buy Mutual Funds?
The first question lingering on your mind is how beneficial are mutual funds? For your information, when you choose this investment path, you will reap big.
Here are the benefits of mutual funds.
When you invest in one asset, the risk becomes high, unlike when you invest in different assets. Mutual funds allocate your capital in various securities, thus reducing the risk of you losing your money. This is done by combining the funds contributed by investors in the fund and investing the money in diverse securities. A phrase that can explain diversification easily is, "Never put all your eggs in one basket."
2. Investment is Expertly Managed
Have you ever engaged an expert in any field to help you perform an activity? When you hired the professional, things went on smoothly, and you didn't spend lots of time. This is how mutual funds work. You will never be present to manage your capital as experts are employed to monitor the fund's securities.
3. Regulated by Government
Investment Ideas that are not regulated by Government bodies are most risky, and stakeholders tend to lose their money without even getting back what they financed. Mutual funds are different as governments regulate it and make it trustworthy, and you won't hear fraud cases when comparing it with similar schemes.
4. Safe and Transparent
Every country has securities and exchange commissions which guide traders and investors. These guidelines ensure that mutual funds are categorized using color-codes for easy monitoring. Furthermore, color-codes helps you know the risk level of your investment.
For example, India's securities and exchange board use these colors to show your investment risk level. Blue means low, yellow means medium, and brown represent a high-risk level.
This makes it easy to compare and know which of your securities is doing well.
5. Versatile for All Investors
Knowing how an investment scheme works is vital to enable you to reduce the chances of scams. But when you choose mutual funds, that won't be the case. Even if you are a beginner or an expert investor, you don't require any knowledge. This is because you will not be managing it, but professional's money managers will help you out. Thus, making it a preferable option than other schemes.
How to Choose Mutual Funds
As said before, Mutual funds are safe and transparent than other investment schemes. The only challenge that arises is how you select your preferred mutual funds. Let that not give you an enormous challenge, as in this section, and you will learn what to consider before picking a mutual fund.
By choosing the right fund, you will realize your goals faster. Therefore, here is how to effectively pick a mutual fund.
1. Identify your Goals and Risk Tolerance
What is your investment goal? That should be your first consideration before you select a mutual fund. Let's say your goal is towards your retirement, paying for your education, and funding your lavish lifestyle like buying the latest car model. When you know and understand your purpose, it will be easy to choose the right mutual fund.
Risk tolerance goes hand in hand with your goals. How much risk tolerance can you handle? There are two risk tolerances in any investment, low and high. If your risk tolerance is small, you need to choose a low-risk fund and avoid high risks. That way, you won't feel bad when a loss occurs.
2. Take Note of Expense Ratio
Expense ratio is the first consideration for every mutual fund company before they trade your capital. Therefore, if the company allocates too much money on its operation and management, it will affect your net profit.
If that is the case, you should avoid such a company and search for one with a low expense ratio. As per Investopedia, the expense ratio is between 0.75% to 1.25%. However, some have a higher or lower value. The lower the expense ratio, the better for you. If you don't know the expense ratio, here is how you can calculate it:
· Divide the total dollar value of fund assets by the whole operation and management expense (funding fee).
3. Choose Between Passive or Active Management
The type of mutual fund management is crucial, and you should consider this when choosing a mutual fund. Passively managed mutual funds depend on the performance of the benchmark index. This type of management has a low expense fee, and securities don't trade often. Additionally, passive management is the best for non-taxable accounts as they don't accrue too much taxable income.
As for passive management, it involves surpassing the benchmark index. For the money managers to achieve this fete, they will spend more time analyzing the market trends. However, this will cost you more when it comes to fees.
4. Size of the Fund
You have already set your investment goals. Now it's time to determine the size of the fund you will choose. Even though people may recommend significant funds that are unnecessary, small funds can also enable you to realize your goals.
When a fund is significant, it becomes challenging for the portfolio manager to monitor the risk. However, for a small fund, the risk is low, and it becomes easy to manage.
5. Pick an Experienced Mutual Fund Manager
Do you want to get the right returns? Then hiring an experienced mutual fund manager should be vital. Research for the top manager before getting to invest your money.
Types of Mutual Funds
Different types of mutual funds fall into different categories due to factors such as asset class, risk, goals, specializes mutual funds, and structure.
So, in this section, I will list types of mutual funds depending on all these features.
The following are types of mutual funds according to Asset Class:
· Debt funds
· Money market funds
· Equity funds
· Hybrid funds
According to Goals
· Liquid funds
· Pension funds
· Capital protection funds
· Income funds
· Growth funds
· Tax-saving funds
· Capital protection funds
· Aggressive growth funds
As per Risk
· Very low
According to Structure
Types of specialized mutual funds
· Funds of funds
· Index funds
· Real estate
· Asset allocation
These are some of the types of mutual funds. There are thousands of them, but these are the standard mutual funds. Engage a portfolio manager to assist you in choosing the right mutual fund.
5 Good Growth Funds
Are you looking forward to investing in growth funds? Then this is the right decision you made. This fund has a high reward but with an increased risk too. Therefore, when choosing a growth fund, you need to have a healthy risk tolerance. Portfolio managers advise investors who are not retiring soon to opt for growth funds. But if your retirement period is close, please choose another fund.
Furthermore, if you are not prepared to risk high, don't go for this fund as it's a high-risk investment.
So, here are five of the best growth funds.
· Fidelity blue chop growth K6 fund
· Fidelity Freedom blend 2050 fund
· Fidelity capital and income fund
· Fidelity flex U.S. bond index fund
· Fidelity zero international index fund
Investing in mutual funds is beneficial, but you need to know about its benefits and demerits. That way, you will quickly learn how to select the right type of mutual fund. Therefore, by reading this guide comprehensively, you will stand a better chance of reaping big when you invest in mutual funds.