Investing in Mutual Funds

How do Mutual Funds Work?

One of the best aspects of investing in mutual funds is that with each investment, there is instant diversification. Diversification is important for all investors because it reduces risk. It is important to take risks when investing because without risk, you won’t make very much money.

For example, putting your money in a traditional bank account has little to no risk (as long as it is within the $100,000 FDIC insured), but at 1% or less, you will make next to nothing. You do need to take risks when investing. The younger you are, the more risk you should take.

Diversifying your investments eliminates a lot of the unnecessary risk that comes with investing. If you invest $100,000 in one company and it loses 5% for the year, you just lost $5,000. If instead you invest $20,000 in 5 different companies and they earned -5%, 2%, 16%, 8%, and 9%, you would have made an average return of 6% and made $6,000. It wouldn’t be as big of a deal that you lost 5% because you gained in the others.

Mutual Funds Work through Diversification

Mutual funds are able to include hundreds of investments in stocks, bonds, currency, and other securities. How are they able to include such a wide array? Essentially, you are buying tiny pieces of each investment. You would not normally be able to do this with a brokerage firm, but the unique aspect of a mutual fund allows you to do just that.

A mutual fund takes a large group of investors. Each investor is interested in investing in a certain type of investments. The mutual fund collects to money from the investors and uses it to purchase many shares of whichever stocks they choose. They then turn around and issue a share of the mutual fund to the investor containing many pieces of other stocks.

If you were wealthy, you would easily be able to invest in many different companies and have someone manage your portfolio for you. Unfortunately, most of us aren’t very wealthy, and we must start small. Mutual funds are the perfect solution because they protect your investment by instantly diversifying your portfolio.

If you want to start investing money now, but you don’t know much about investing, you should try investing in mutual funds. Even if you start learning and studying up on how to invest, you can invest in your own stocks later, but still start investing now so you start earning money as soon as possible.

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How do you get Money to Invest?

There are a couple different ways to invest more money.  You want to invest more money because you know you will make more money and that is a great way to think.  One way is to buy stock on margin.  This means you are borrowing someone else’s money to add to yours in order to make more money.

Buying on margin isn’t exactly getting unsecured loans .  An unsecured loan is where there is something for collatoral like a house or car, but with this type of borrowing, your money is collatoral.  Some people probably do well with this, but you are taking a big chance that you will lose more than you invest.  Make sure you fully understand margin before you use it.

If that doesn’t appeal to you, you can always invest more of your own money.  There are plenty of ways to do this.  Every time you spend money think if you would rather have what you are purchasing or have more money a little later to buy something much better.

Don’t decrease your quality of life to invest every penny you make, but I’m sure you can find quite a bit of money hidden in places you never thought of.  Think carefully when you spend and choose to save instead.

To add that much more, try getting a second job.  If you got a part time job making $100 a week, that’s an extra $400 a month or $4,800 a year you can invest.  That will add up fast especially if you are already investing a good amount to start.

Let me show you have these simple points can allow you to invest and earn so much more.

To start, you are investing $200 a month or $2,400 a year.  If you go through and save wherever you can, you are able to find an extra $300 a month or $3,600 a year for a total of $500 a month or $600 a year.

Then, you decide to get a part time job working 15 to 20 hours a week making 7 or 8 dollars an hour and are able to put aside another $400 a month for a total of $900 a month or $10,800 a year.  That is a difference of $8,400 a year!

If you were able to invest and make an average return of 8% investing that amount each year for 10 years, you would be increasing your earnings from approximately $37,000 to $167,000 which is a difference of $130,000.  Can you believe that the little extra work will get you an extra $130,000 in just 10 years time?

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Why Should I choose No Load Mutual Funds?

What is a no load-fund mutual fund?

A load is essentially a commission you pay on the mutual fund. With a no-load mutual fund, you don’t have to pay a commission for your mutual fund because it is distributed to you directly from the investment company.

Load mutual funds usually charge you a percentage of your return. For example, they might charge you a 3% commission. If you make a 6% return, you only get 3%. This is an example of a back-ended fund because the commission is taken out of the proceeds. This is slightly better than a front-end fund because the fee you pay has had time to earn money. With a front-end fund, you pay the 3% up front and that money has no chance to earn any money.

From first impressions, you assume a no-load fund is superior because you don’t have to pay a fee, and most often, this is true. Think about it; if you invest in a load fund that’s making a 12% return, that’s great. It’s also more than 8% that maybe another no-load fund is making, but if the load commission is 5%, you’d still be making more with the no-load fund.

Just because it’s a load fund, doesn’t mean it will earn you more money.

With many things in life, we often think that the more it costs, the better it is. This is often not the case. In fact, some colleges raise their tuition just to get more people to enroll because they think that with a higher price, they have increased the value of their education. In actuality, they’ve changed nothing about their teaching.

Also, even with the experience and knowledge fund managers have, it is impossible for them to always find the perfect stocks that will make the most money. The stock market, or any market for that matter, is impossible to predict. While they can make predictions of what a stock will do based on the past and technical information, it’s still possible that you could choose stocks randomly from the paper and have a better return.

Financial knowledge and research will help in investing, but over the long haul, it’s very possible you will probably earn at least the same amount with no-load funds or even more, than with load funds after commissions.

What about Hedge Funds?

Many news stories have recently come out talking about hedge funds. Hedge funds are similar to mutual funds but are not subject to the same regulations as mutual funds and are therefore some investors consider hedge funds to be more risky than highly regulated mutual funds. Many investors in mutual funds would not be able to invest in hedge funds because of the high minimum net worth requirements (usually $1 million). Nonetheless, there are many enterprising portfolio managers are asking how to start a hedge fund and are finding that it is relatively easy to do, with the right legal counsel of course. 

What should you choose?

Unless you are very confident in a load fund, I suggest going with a no-load fund. You will at least save some money up front.

If you are interested in furthering your knowledge of mutual funds and possible get into trading them, pick up a copy of Profitable No-Load Mutual Fund Trading Techniques: For the Individual Investor.

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