A mutual fund is an investment vehicle that pools money together from a number of investors and invests it in various combinations of stocks, bonds and other securities. Oftentimes these funds are managed by a person known as a fund manager. There are many types of mutual funds, including ones that invest in specific industries, ones that invest in companies based on size, and ones that invest based on varying strategies, including growth and value funds. Mutual funds can be an affordable way for someone without a lot of capital to invest a little in many companies. This diversification can help reduce risk. Joining a mutual fund does not require much investment knowledge or initial funds.
Things You'll Need
- Initial investment capital
Find a broker. A broker is a person or entity that will serve as your liaison with the mutual fund to set up a purchase. There are various types of brokers, ranging from discount brokers such as Scottrade and eTrade, which operate predominantly online, to "brick-and-mortar" brokers. These brokers can be contacted through financial institutions such as banks and insurance companies. In some instances, you can bypass brokers and purchase shares of a mutual fund directly from the fund itself.
Talk with your broker about your investment goals. If you are investing for retirement, your broker will probably ask at what age you plan on retiring and your level of risk tolerance. This will help determine the diversity of your investment portfolio. Based on this assessment, your broker might encourage you to join a fund that has more equity than bonds, which would be characterized as a higher-risk fund.
Fill out the necessary paperwork once a fund has been chosen. Your broker will give you contracts and legal documents for your review. It is important to read through these documents, which contain information regarding your expense ratio (fees that the fund collects annually), your rights as a fund member, and your understanding that an investment does not guarantee a return.
Supply your broker with a check or money order for the amount you wish to invest. All mutual funds have minimum investment requirements. When determining which fund is right for you, your broker should discuss this and choose a fund based on how much you are willing to start with.
Tips & Warnings
- Shop around for a broker that meets your needs. For example, discount brokers are best suited for people with some investment knowledge.
- All mutual investments carry with them a degree of risk. There is no guarantee that you will get a return on your investment. For further information, read the U.S. Security and Exchange Commission's "Investing Wisely: An Introduction to Mutual Funds."
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