Let’s continue our series with investing fundamentals in a summary bullet format. Here is a really quick summary of mutual funds. Then review my more detailed articles for the areas that will help you invest wisely.
Summary of Mutual Funds Investing Fundamentals
- There are basically three types of mutual funds: money market, bond (fixed income), and stock (equity); but there is an almost endless variety of combinations, sub-categories, and investment styles.
- Money market funds are best for keeping savings that you may need soon or really want to keep safe, but it will not grow fast enough to beat inflation or meet long term goals such as college and retirement savings.
- Bond funds are easy to buy and sell, and pay monthly income that beats inflation, depending upon the type of bonds. Prices can fluctuate from factors such as interest rate moves, but have much less volatility than stock funds. They are safe for mid-term savings goals (3-5 years) and providing diversification among your total investments.
- Stock funds have basically the same risks and rewards as individual stocks – high volatility, risk of losing money, easy to buy and sell, good growth to beat inflation, and historically among the best returns, on average over time. They are best for long-term savings goals, time horizons greater than five years.
- Investing in mutual funds is easier, less risky, takes less time, and costs less cash than investing in individual stocks or bonds.
- Mutual Funds provide diversification, professional management, time savings, systematic investments, little cash, good liquidity, and many services when managed thru big fund companies.
- Disadvantages may include high expenses that reduce our returns. There is no reason to buy funds with “load” charges that take a huge chunk of your savings without performance that is any better than no-load funds. Just say no to load funds even if your advisor pushes them to get his cut.
- The most common way people select funds is also the worst – choosing the hottest performers of the moment and buying high. Past performance is not a reliable indicator of future performance.
- The best way to choose funds is with good long-term performance over the past 1, 3, and 5 years; low expense ratios; and tax efficiency if in taxable accounts.
- Many websites provide recommendations and fund screeners so you can filter fund types, styles, long-term performance, ratings, and many other factors.
Now you are ready for more detailed articles on investing fundamentals.