Buying individual stocks is certainly a way to try and grow your wealth in the market, but it comes with considerable risk. In addition, choosing which stocks to invest in requires doing extensive research beforehand.
For those who want a way to invest that’s more convenient, with lower costs, less risk and more diversification, mutual funds are a good option.
How mutual funds work
Mutual funds work by pooling money together from many investors. That money then gets used to purchase stocks, bonds and other securities. Because mutual funds invest in a collection of companies, they offer instant diversification (thus lower risk) to investors. Mutual fund investors share in the fund’s profits and losses.
You have probably heard of index funds and ETFs before, which are two types of passive-investing mutual funds. There are also, however, actively managed mutual funds. These are mutual funds that are run by fund managers who choose your investments and buy/sell securities based on the fund’s goals.
Actively managed mutual funds usually aim to beat the market (though outperforming the market regularly over the long term is hard to do), while passively managed index funds, for example, work to simply match the market’s performance. For example, an S&P 500 mutual fund would try and replicate the performance of the S&P 500 stock market index buy investing in a tiny percentage of each of the companies in the S&P 500.
With mutual funds, investors have a lot of choices to try and grow their money between stock funds (“equity funds”), bond funds (“fixed-income funds”) or funds that offer both (“balanced funds”). Within these categories, there are even more distinct funds to choose from. For example, “sector funds” allow you to invest in a specific industry, like clean energy, while “growth funds” allow you to focus on companies with capital appreciation.
Get started investing in a mutual fund with a brokerage account
Since actively managed mutual funds require daily human management, investing in one could come with higher management costs and fees than choosing a passively managed index fund. Also, note that many mutual funds will require a minimum investment, ranging from $500 to $3,000. Though some have no minimums whatsoever.
To start adding mutual funds to your portfolio, look for brokers that offer no transaction fees (these are commission fees for buying or selling a fund share) and low management fees (also known as expense ratios). For example, Fidelity Investments has over 3,400 mutual funds with no transaction fees, but keep in mind that some of Fidelity’s mutual funds may require reaching specific funding thresholds. Its robo-advisor option, called Fidelity Go®, invests in zero expense ratio Fidelity Flex® mutual funds that do not charge management fees or, with limited exceptions, fund expenses.
With E*TRADE, there are no transaction fees for over 4,400 mutual funds and with Charles Schwab, there are no transaction fees for over 4,000 mutual funds. Many of the expense ratios for Schwab’s funds are extremely competitive, some as low as 0.05%.
Robo-advisors like Wealthfront, Betterment and SoFi will build you a portfolio of mutual funds (usually in the form of ETFs) based on your risk tolerance, time horizon and investing goals. Robo-advisors will rebalance your portfolio over time as you get closer to your investing targets and based on market conditions.
