Ten years ago, I pondered this very question. For me, playing the lottery was out (poor odds), and I wasn't ready to jump into stock market investing (too complicated and time consuming for me at the time). It was then that I learned about mutual funds, realizing this was the best financial fit for me. Here's what you need to know if you, too, are curious about mutual fund investing.
What are mutual funds?
Mutual funds are groups of stocks that are managed by a company. Each fund has a general style (like funds that might all be related to real estate investing, overseas investing, or small-market investing), and each fund will have many, many companies that comprise it specifically. For instance, a fund might have 1% Starbucks stock, 2% Amazon stock, 1.5% Ford Motor company stock, etc. So if you have ever wanted to "own" a piece of a company without buying full stock outright, this is a way to go.
What are the risks?
Savings accounts and bank certificates of deposit offer a guaranteed rate of return (sometimes as low as .01% or as high as 1%) and are FDIC-insured. Mutual funds are not, and there is no guaranteed rate of return since they fluctuate with the market. But that's no reason to be paralyzed out of investing. Mutual funds are balanced by a carefully-managed collection of companies, so if ever, say, Barnes & Noble is part of your fund and it goes bankrupt, the company may only be 1% of your portfolio. The collection of companies in a fund is a safety net in itself.
What are the rewards?
Since there is no locked-in rate of return like on a CD or savings account, any return is possible! There's no "cap" on earnings potential. Also, there is no fixed rate of time for which you must keep a mutual fund (though do think of them as built more for long-term investing than short-term runs), so this means you can have access to your money at any time, making you in control of your investing. Dividends are also paid by companies (which are routine, often seasonal payments), so this means you still "get" money while keeping your base investment intact.
Where can I learn more?
Check out some general-audience investing or money management books and advice by Suze Orman or Dave Ramsey. Also, learn more through online articles at Kiplinger. Then, consider contacting a mutual fund company directly like Fidelity, Legg Mason, Janus, or Vanguard. Note: There is a great FAQ page at Vanguard to help you understand mutual fund terminology. Money managers are available — for free! — at these companies to help answer your questions about investing or to help you decide what type of mutual fund might be best for you.
- Investing in a mutual fund is a big decision, and small steps — like starting with one fund — might be best. I started investing this way at age 18, added small amounts when I could (treating the fund, for investment purposes, like a long-term savings account) without touching the money. Some years, returns where less than 5 percent; other years, I lost 10 percent for the year — and other years, my money returned as much as 40 percent! Over the long haul, my money has netted, on average, about 10-15 percent per year. So don't worry about daily market gains/losses; with a mutual fund, focus on a long-term approach to building money.
- Don't be afraid to ask questions, especially of experienced fund advisors; they can help you determine your investing style and suggest strategies that might work best for your lifestyle and financial goals.
- You don't need a third party to help you invest your money. With some background knowledge and the right approach, you can invest in mutual funds yourself. Your hard-earned money can now have a place to grow, and you'll love the satisfaction of having gone from "curious" about mutual funds to a smart (yet still careful) investor.