How to invest in a mutual fund?
I would like to invest in a mutual fund but I don't know where to start.
- Anonymous9 years agoFavorite Answer
If you don’t want to spend a lot of time with your investments, Mutual funds can be the best solution.
A Mutual fund will provide you with a good diversification and your money will be professionally managed.
Unfortunately, like any investments, you must do your homework before investing. Basing your investment only on past performance will be foolish.
How a mutual fund works?
Open ended funds.
The majority of mutual funds are open funds. Open funds continuously issue shares.
Closed end funds.
A closed end fund has a limited amount of shares.
An investor can invest in a closed end fund by buying shares on a secondary market.
Where to find mutual funds?
You can find mutual funds on MorningStar’s website.
How to buy a mutual fund?
With a broker, online broker, your bank, directly submitting to the fund.
Types of mutual funds:
Money Market funds.
Money market funds invest in short term paper like treasury bills (short term bonds, less than one year maturity).
They are very safe but provide a modest performance. The performance for money market funds is correlated with short-term interests.
Bond/fixed income funds invest in fixed income securities like bonds, Mortgage backed securities and asset backed securities.
Equity funds invest principally in stocks. The performance is generated by capital appreciation and dividends.
Equity funds can be divided in the following categories:
Value fund, growth fund, sector fund, fund of funds.
Stocks and bonds compose balanced funds. A balanced fund can provide you a good diversification by buying only one fund.
They have the advantage of investing worldwide. The principal drawback is that the fund manager must deal with various exchange rates.
If you believe that the fund managers are not able to beat the market.
You can still invest in an index fund. The management fees are usually lower because the fund only follows an index.
How to choose a Mutual fund?
To elect a mutual fund you should look for the following items:
Prospectus: an important document.
In the prospectus, you will find the most important information on the fund.
Front load and back load. Avoid funds with front load and back load.
Historically these fees were supposed to cover the marketing expenses.
They can be very high up to 5% and sometimes more.
Management fees and administration fees.
Management fees are the fees you pay to the fund manager each year, they usually rank from 0.5% to 2%. Naturally, if you invest in a mutual fund, watch for the lower management fees. For example, investing in an index fund is interesting because the management fees are usually lower (around 0.5%)
Administration fees are fixed fees of the fund (for custody and other administration expenses), you should pay again each year. Usually they are around 0.10 %.
You can easily control the total amount of fees by looking at the expense ratio.
With a too small mutual fund, the fixed fees will represent a large part of the performance. If the fund suffers many redemptions it will be force to close.
If the fund is too big, the fund manager will have some difficulties to put in place his strategy. For example, a lot of funds are closed to new investors. Like this the manager can pursue his strategy in a better environment.
The fund should have survived during various economics cycles.
When investing with a mutual fund, you should check the fund manager credentials. Look for an experienced fund manager.
Along with your investment, keep an eye if any turnover regarding the fund management team.
A mutual fund should always be fully invested otherwise you won’t get any performance but the fund manager will still get paid.
To verify this point, you can refer to the prospectus.
Avoid funds with a high turnover ratio (churning). The portfolios with a high turnover provide less performance. As these funds buy and sell a lot of securities, the performance is generally less than stable portfolios.
Net asset value (NAV).
The net asset value is calculated by summing the portfolio assets less any liabilities (like the fees).
The net asset value of a mutual fund is calculated periodically (every days, every months for example).
Before buying a mutual fund, it is important to check if the price you pay is close to the NAV per share (the real value of the fund).
Avoid buying fund before the distribution date.
Avoid churning funds.
It is better to invest in a tax deferred or tax exempt account like IRA or your 401(k).Source(s): www.morningstar.com www.yourportfolio101.com
- 9 years ago
in 2 ways...offline and online. In offline mode you need to fill up specific funds form and submit it to respective AMC ( asset management company) along with cheque and KYC acknowledgement. You can take the help of any mutual fund agent if required.
Alternatively get one account opened with Brokerage houses like icici direct or HDFC securities and make the purchases online.Source(s): www.marvelinvestments.com
- Go with the flowLv 79 years ago
First step - open a discount brokerage account
Note - there are minimum amounts required