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Mutual Funds for Beginners — How to Start Pooling Your Investments

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The proverb “Don’t put all your eggs in one basket” might as well have been invented for mutual funds. The funds can be an easy way to keep your investment portfolio diversified while letting money managers do the heavy lifting.

What is a mutual fund?

Mutual funds are actually companies, according to the SEC, that let individual investors pool their money with other investors to purchase a collection of stocks, bonds, money market instruments, and other securities—a portfolio that might be difficult or laborious to purchase individually. Instead of owning shares of the securities, investors in mutual funds own shares of the funds.

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Source: istock

Professional money managers operate mutual funds and work toward specific investment objectives. Investors can gauge a mutual fund’s performance by comparing its returns against the S&P 500 Index or some other benchmark, according to Fidelity. Generally, experts recommend looking at a mutual fund’s three-year and five-year returns to evaluate its success.

How are mutual funds beneficial?

The SEC states that mutual funds futures are fourfold — professional management, diversification, affordability, and liquidity.

Mutual funds are popular because fund managers do the research and the adjustments on investors’ behalf. The portfolios usually cover a range of companies and industries. Mutual funds have threshold amounts for initial investments and investors can “redeem” their shares and sell the shares back to the fund at any point.

How do you start investing in mutual funds?

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Instead of buying shares from other investors, you start investing in a mutual fund through the fund itself or through a broker for the fund. The price you pay is the fund’s per-share net asset value—the total value of the portfolio’s securities divided by its outstanding shares—plus any applicable fees. The net asset value (NAV) doesn’t fluctuate by the minute like stock prices do. The NAV is settled at the end of each trading day.

After you invest in a mutual fund, you usually earn money through dividends on stocks and interest on bonds in the portfolio, capital gains from selling securities, and selling shares in the fund after the fund has increased in value, according to Investopedia.

What is the minimum amount for a mutual fund?

According to Fidelity, “While individual purchase minimums may vary by fund, and can be as low as $100, most funds will let you buy shares with as little as $2,500.” The company also said, “In addition, minimums are often waived or reduced if investors buy a fund within a retirement account or use certain brokerage features like automatic investments to regularly invest over a set time period.”

However, Fidelity noted that minimums are “often waived or reduced if investors buy a fund within a retirement account or use certain brokerage features like automatic investments to regularly invest over a set time period.”

As with any money decision, it’s wise to read the fine print. The SEC offers a three-part guide to reading mutual fund prospectuses.

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