Mutual funds can help you work toward goals such as education savings and retirement. You may be asking what a mutual fund account is and how much you need to get started. Here are the basics of mutual funds, including the benefits and risks, and some steps to take when starting to invest.
What Is a Mutual Fund Account Used For?
A mutual fund account is an investment account used to buy mutual funds. These accounts may include:
- Brokerage accounts
- Individual retirement accounts (IRAs)
- Employer-sponsored retirement accounts
You can open a mutual fund account through:
- Mutual fund companies
- Online brokers
- Full-service banks
While some online brokers and mutual fund companies allow investors to get started for less than $100, the minimum initial investment amount for mutual funds generally ranges between $500 and $1,000. Some mutual funds companies may require as much as $3,000 to get started.
However, when investing in an employer-sponsored retirement plan, such as a 401(k) plan, there is no minimum initial investment. Employees can start investing in mutual funds, which is the most common investment type in a 401(k), for as little as a few dollars.
Pros & Cons of Mutual Funds
Mutual funds may fit many investors, but they are not right for everyone. Here are some of the main pros and cons to consider:
Possible Advantages
- Diversification: Many funds invest in dozens or hundreds of securities, such as stocks or bonds. Buying one fund gives you exposure to multiple investments. Diversification does not guarantee a profit or prevent losses in a declining market.
- Professional Management: A fund manager researches and selects the investments, which may save you time and effort
- Compounding Growth: Reinvested dividends, interest, and gains may help investments grow over time.
Potential Disadvantages
- Potential for Loss: Mutual funds carry principal risk. You could lose money, including your original investment. Past performance is no guarantee of future results.
- Limited Liquidity: After selling shares, it may take up to two business days to receive your cash.
- Fees: Expenses often range from 0.5% to 1.00% of assets. Some funds also charge sales fees.
How to Get Started Investing With Mutual Funds
Getting started investing with mutual funds can be straightforward. A registered representative can also assist you. Here are steps that you'll need to take to get started.
Step 1: Choose an Investment Company
Mutual funds are typically purchased either directly through a mutual fund company or through an online broker or bank. Do some research to identify which outlet you want to use.
Step 2: Open an Investment Account
Investors may invest in mutual funds with a range of account types, including traditional brokerage accounts, individual retirement accounts (IRAs) or education savings accounts. Opening the account is relatively quick and simple and requires some personal information, such as your name, address and social security number.
Step 3: Fund the Account
Investment accounts can be funded by establishing an electronic funds transfer from a bank account or coordinating a physical deposit. There may be a minimum investment for mutual funds required, depending on your desired choices, so be sure to give some thought to this.
Step 4: Select Your Mutual Funds
Many investors start investing with a broadly diversified stock fund. When making your choices, make sure each selection is suitable for your risk tolerance and time horizon.
Step 5: Make the Initial Investment
Many mutual funds have minimum initial investments of $500 to $1000. After this initial investment, the subsequent investment amounts can be much lower.
Step 6: Set up Automatic Contributions
Setting up a systematic investment plan for periodic deposits, such as once per month, can be a smart way to build wealth over time.
Bottom Line
Mutual funds can be a practical option for many investors. Before investing, review the potential benefits and risks. While mutual funds can be relatively easy to understand, a registered representative can help you select funds and manage your account.
Mutual funds provide a accessible way to begin investing with ease. Start Investing
