How to Start Investing in Mutual Funds Online
Investing, while a highly profitable venture, demands a lot of effort, resources, and time. Unfortunately, only a few individuals can boast of all. Of course, we wouldn’t need to spare them if we were High Networth Individuals (HNI) with personal wealth managers. But then, even that is not realistic for the average earner.
Does that mean that the average person cannot invest? The answer is no. There are investment types that anybody can do, regardless of their net worth and time invested. One of these is mutual funds. And in this guide, you will learn how to invest in mutual funds irrespective of your financial strength.
What is a Mutual Fund?
Mutual funds refer to companies that pool funds from different investors with the purpose of investing it. Mutual fund managers invest in different securities like stocks, bonds, commodities, and real estate. If the asset type promises a return on investment, you can expect a mutual fund manager to be interested.
To invest in a mutual fund, you will need to buy shares. And the more shares you have, the more part of the fund you own. Ideally, this translates to: the more shares you own, the greater part of the profit generated you will get. By the way, the totality of investment types a mutual fund holds are collectively referred to as its portfolio. To illustrate, let us say a mutual funds company X has invested in stocks, real estate, and commodities. Then, its portfolio will be stocks, real estate, and commodities.
Finally, mutual funds investing is much easier today than ever before. This is because of the internet has increased accessibility, with mutual funds platforms springing up everywhere. What’s more? It has made mutual fund investment tools more readily available than ever before. Consequently, it is easy for you to be an investor – in this scenario, a mutual funds investor – than ever before.
Why Should You Invest in Mutual Funds?
Investing in mutual funds has several benefits, and some of them are discussed below:
- Professional management
One of the foremost advantages of mutual funds investing is professional management. Mutual funds managers are people with vast experience in investing. Usually, they have been working in the industry for years. Overtime, they have gained a good understanding of the markets and how they work. Thus, they can recognize the most profitable assets to invest in, the best time to purchase them, and when to sell them for profit.
Mutual funds administration is transparent. How is that? Mutual funds are subject to industry regulation. As a result, their managers have to be accountable and fair to the investors. If they fail to do this, they will be subjected to penalties from the regulatory body(ies).
Diversity is the nature of mutual funds. The portfolio of a mutual funds company is hardly ever a single asset class. This mixing of different assets in one portfolio reduces the risk an investor is exposed to. So, when a particular asset performs poorly, the performance of other assets can cover for it. As a result, the investor can still get profitable returns on his investment.
- Varied options
Mutual funds investing provides investors with a wealth of options to choose from. For one, there are different types of mutual funds. Money market funds, target date funds, bond funds, and stock funds are the four main types. Furthermore, different managers favor different styles and some prefer a combination of these styles.
Would-be mutual funds investors can, thus, research and select from the numerous available options they think has the best chance of success.
- Better returns
When compared to other investment types like fixed and recurring deposits, mutual funds provide a higher return on investment. Whether low risk or high risk, you will find that mutual funds generally offer more returns than the investment types above.
Yet another advantage of mutual funds is that they have a low barrier to entry. You do not need a huge sum of money to invest in one. As we have mentioned, becoming a mutual funds investor requires the purchase of shares. Most mutual funds companies set a relatively low price for initial investment and even for later purchases of these shares.
Mutual funds, especially in this day and age, are fast, simple, and convenient. This development is largely in part the result of technology and the internet. Now, you can initiate – and in some cases, complete – the entire registration process, as well as the KYC process on the internet.
Mutual funds are highly liquid. This element is due to the ability to trade them on major stock exchanges. Consequently, you can easily sell your shares for liquid cash. By the way, when you liquidate your shares, you will be paid their current net asset value (NAV) plus whatever redemption fee is involved.
Where to Buy Mutual Funds Online
There are several mutual fund platforms and investment websites from which you can buy mutual funds online. These platforms can be divided into three basic categories. We have highlighted the below:
1. Through an Investment Firm
This is one of the most efficient ways of mutual fund purchase. It involves buying mutual funds through the investment companies that sell and manage them. These companies include private boutique firms and publicly traded giants.
It is important to note that every investment firm offers a minimum of a few different mutual funds. Additionally, these assets are designed for different investors with various investment goals. Some of the more popular mutual fund examples are: passive index funds, high-yield bond funds, active equity funds, and others.
As opposed to other mutual fund purchase methods, investment companies usually do not charge sales commissions or brokerage fees. As such, the totality of your funds is directed towards investing, which equates to more money for you. Unfortunately, this also means that you can only buy from the limited range of funds the firm offers.
2. Through an Investment and Financial Services Company
Certain investment companies allow you to purchase a wider range of mutual funds than they offer. However, you have to register with one of such companies before you can enjoy this benefit. Examples of these companies are Vanguard Group and Fidelity Investment.
You have to buy and sell exchange-traded funds (ETF) and mutual funds with other firms to purchase the funds your investment firm does not offer. However, you need to ensure that these other firms are also investment and financial services companies. Further, they must offer your desired funds.
Bear in mind that these firms prefer to sell their proprietary funds.Therefore, trading with other firms will attract additional fees or commissions.
3. Through a Brokerage
The third and final option is to open an online account at a brokerage. It is also perhaps the most expensive option. This is because the accounts involved usually attract a fee or commission for each transaction. Additionally, some accounts charge fees for account setup and/or account maintenance.
Owing to the amount it charges, buying mutual funds through a brokerage provides you with the broadest range of mutual funds for sale. Examples of online brokerages are E*TRADE and Betterment.
How to Invest in Mutual Funds Online
Do you want to invest in mutual funds? Would you like the hassle-free and convenience doing so online affords you? If yes, follow the steps to invest in mutual funds outlined below.
Step One: Determine Your Financial Goals
The first thing is to determine your aim for investing in mutual funds. Thereafter, categorize them – your goals – according to your timeframe for achieving them. Segment them into short-term or long-term. For instance, investing to buy a car or home, plan a wedding, etc., within a few years is a short-term goal. Conversely, investing for retirement, college fees, etc., are long-term goals.
However, some investors don't have a specific investment goal apart from wealth gain. If you belong to this category, you should decide on the amount of money you want to accumulate. You should also decide how long you want the investment to take. The purpose of these is to enable you focus on certain investment factors like:
- level of risk
- payment method
- lock-in period, and others
Step Two: Select Your Preferred Mutual Funds Strategy
There are several mutual funds strategies available to choose from. However, each strategy is designed to achieve a particular goal. Subsequently, you have to choose the specific strategy that aligns with your investment goal.
- Near-term goals: This investment strategy is perfect for investing for a few years. It focuses on investing in assets with reduced risks.
- Mid-term goals: This strategy is most ideal for financial goals that are five to ten years away. It involves investing in assets that have a reduced potential for experiencing rapid changes in value.
- Long-term goals: This strategy is best for financial goals that are decades away. It involves investing in companies that are projected to have a rapid growth rate.
- Target-date funds: This strategy is not associated with a portfolio allocation. It involves choosing a certain year in the future when you'd have to withdraw your funds. Note that the further away from the target date, the riskier the assets the fund invests in. Similarly, when the target date becomes near, the fund adjusts its holdings to low-risk assets.
Step Three: Research Potential Mutual Funds
Finding the right mutual fund is not an easy task. The reason for this is that you have to research numerous mutual fund options, which can be quite demanding. Fortunately, there are certain mutual fund search tools that make the process easier. They achieve this by providing detailed information on several mutual funds in different categories. Examples of these tools are Mutual Funds Observers and Maxfunds.
Additionally, most brokerages' websites feature mutual fund search tools for their clients.
Below is a list of some factors to watch out for when choosing a mutual fund.
- Past performance - A mutual fund's historical performance is a good indication of how it achieves its stated goals.
- Expense ratios - These refer to the annual fees charged by a mutual fund's management. It is usually a certain percentage of your total percentage.
- Management - Funds can be actively managed or passively managed. Note that actively managed funds charge higher fees and have a potential for richer returns.
- Load fee - These refer to sales commissions paid to brokers who sell mutual funds.
Step Four: Create Your Mutual Fund Account
Most employer-sponsored retirement plans invest in mutual funds rather than stocks or bonds. As such, if you already have a retirement plan, you most likely have a mutual fund account already. If you, however, do not have one, you first need to proceed to the website of the firm you want to invest with. Note that you can also open a mobile app fund by installing the mobile app of your preferred mutual fund.
Next, you need to create your account by complying with Know Your Customer (KYC) guidelines. These include providing your personal and financial details, like Permanent Account Number (PAN), Aadhar number, bank account details, etc. You also need to choose an account type, among others.
Step Five: Start Your Mutual Fund Investment
Finally, before you start investing in mutual funds, ensure you have enough money in your investment account. Remember that mutual funds have higher investment minimums compared to other assets. Also, ensure to consider the risks involved in every investment you intend to make.
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