Mutual Fund Investing Basics
Before we learn how to invest in mutual funds, we should first go over some of the basic concepts. When you invest in a mutual fund you are investing in a mix of several different stocks and bonds. The exact mix of stocks and bonds and which stocks and bonds are included differs from fund to fund.How Mutual Funds Work
Mutual funds are run by investment companies. Each mutual fund has a manager (or a team of managers) that works for the investment company and who is responsible for the mutual fund's performance. The manager decides which stocks, bonds, real estate, and other investments the fund invests its money in. The fees that the fund charges is to cover the costs of paying the manager as well as the fund's transaction fees for buying and selling the individual investments.When you invest in a mutual fund the money you invest is conceptually split between each one of the hundreds of investments the fund manager has chosen.
Choosing a Mutual Fund Type
The first step to investing in mutual funds is choosing the type of fund you are interested in. Some mutual funds track the S&P 500 (these are called "index funds"), others are high-risk, and some invest only in government bonds. Choosing the mutual fund that is right for you depends largely on your risk-tolerance and when you plan on using the money. The good news (or bad news if you are easily overwhelmed!) is that no matter what your investment style, there is probably a mutual fund out there for you.Choosing a Mutual Fund
Once you determine the type of mutual fund you would like to invest in, the next step is to choose the actually mutual fund! If you go to some of the big mutual fund companies (such as Vanguard, or Fidelity) you can view their listings of mutual funds. When you find one that is the type you have decided on you can request the prospectus.Investment companies maintain a prospectus for every mutual fund they oversee. The prospectus details the goals of the fund (high returns with or high risk, or following the S&P 500, for example) as well as the fees the fund charges. A mutual fund's prospectus is usually provided to potential investors free of charge.