Mutual funds are among the most widely used forms of investment around the world and offer great advantages for individual investors to access multiple investment options across economic sectors and regions of the world.
According to data up to last year of the Investment Company Institute Global, London-based investment fund research and analysis organization, investments in mutual funds reached $12 trillion, which represented a 1.5% to this year and 8% more compared to the last year.
How to invest in mutual funds?
Follow these tips …
1) Investment within the reach of individual investors: The funds receive the money of hundreds or thousands of investors. And even if your investment is small, the investor has access to professional money management. In addition, the individual investor can diversify their investment through the funds and with small amounts since it can be invested in a fund starting at 1,000 or 2,000 dollars.
2) Diversify the investment: When you start investing with little money, it is difficult to invest in various alternatives. But if you invest in funds it is possible to diversify and even globalize the investment from the first day. There are funds that replicate or invest the money in the shares of the companies that make up an index of shares. In this way, a high diversification can be achieved.
3) Set a goal: It is important to chart a goal or determine what the money we are saving is for. The goal will determine the risk you can take with your money.
For example, if saving is for retirement and that will happen in 20 or 30 years, you can invest more money in higher risk options like equity funds. If, on the other hand, the money is for next year’s vacation try to look for savings to be more protected in low risk alternatives such as US government bond funds.
You may also like to read another article on BSOinvest: How to invest an inheritance
4) Select the funds: It is literally like looking for a needle in a haystack because you have to look through thousands of options. There are funds for almost everything: specialized in shares of US companies, companies in Europe, Asia or Latin America. There are also funds specialized in business sectors such as high technology, health, pharmaceuticals or mining companies, among many others. And there are also funds specializing in government bonds or futures on commodities such as metals and agricultural products. In addition, there are various combinations of funds that mix bonds and shares.
5) The cost: Another key point is the expense ratio. The cost or expense ratio is an annual percentage that the funds charge for money management. The lower is better for the investor and usually the costs should be less than 1% per year. It is important to keep in mind that a fund’s profitability is in the range of a few percentage points per year and any expense ratio greater than 1% will greatly affect the profitability of money.
6) The risk: The investor must analyze the risk or the possibility of losing money in an investment. In investments, risk is a statistical figure that measures how much the profitability of an investment varies over time. In the case of funds, the investor can see that variability in the last year, last three years or more. It is necessary to look at historical data because the future no one knows. Investments in stock markets use so-called betas. These are statistical calculations that show how much the return of an investment varies versus the profitability of the market in general.
A beta of one indicates that the return on investment varies the same as the market. If the beta is more than one, profitability changes more than the market. If the investors wants the lowest risk, they will have to look for short-term fixed income investments. The profitability of these investments is minimal. Almost like leaving the money under the mattress. In investment, it is inevitable to take risk if you want to obtain greater profitability. Risk is a possibility of change in profitability. The change can sometimes make you lose money or sometimes earn money.