Table of Contents
Table of Contents
Key Takeaways
- Investing in mutual funds - Mutual fund accounts allow you to invest in professionally managed portfolios of stocks, bonds, and other securities through pooled funds.
- Diversification - Investing in mutual funds provides instant diversification across many securities compared to investing in individual stocks/bonds.
- Lower investment minimums - Mutual funds allow you to invest in a diversified portfolio with as little as $500-$1000 initial investment.
- Tax advantages - Some mutual fund accounts like IRAs provide tax advantages like tax-deferred growth.
- Automatic investing - Mutual fund accounts make regular investing easy through features like automatic monthly transfers from your bank account.
Mutual funds can help you address a number of financial goals, including education savings and retirement. But you may wonder — what is a mutual fund account, exactly? And what is this initial minimum investment for mutual funds? These are common questions. We've got the answers.
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, such as a brokerage account, an individual retirement account (IRA) or an employer-sponsored retirement account, that is used to invest in mutual funds. Investors can open mutual fund accounts at many financial institutions, including mutual fund companies, discount online brokers and 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 merit consideration by almost every type of investor, but they are not for everyone. Investors should weigh the possible advantages and potential disadvantages of mutual funds before investing. Here are some of the main pros and cons to consider:
Possible Advantages
- Diversification: Many mutual funds invest in dozens or hundreds of securities, such as stocks or bonds, within one pooled investment. Buying into one of these funds is like purchasing a small portion of each security. Diversification does not ensure a profit and does not protect against a loss in a declining market.
- Professional management: Rather than having to research and analyze investment securities, investors can buy a mutual fund and leave the work up to the fund manager to choose the investments.
- Compounding growth: By reinvesting gains, dividends and interest earned, if any, mutual funds may grow faster over time compared with other investment alternatives.
Potential Disadvantages
- Potential for loss: Mutual funds carry principal risk, which is the risk that an investor can lose the original amount invested. Past performance is not an indication of future results.
- Lack of liquidity: It can take up to two business days to get cash out of a mutual fund after selling shares.
- Fees: Mutual fund expenses typically average between 0.5% and 1.00% of assets, and some funds have additional sales charges.
How to Get Started Investing With Mutual Funds
Getting started investing with mutual funds can be relatively quick and easy, and a registered representative can help you with the process. Here are six typical steps that you'll need to take to get started:
- 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.
- 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.
- Fund the account with cash. 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.
- Choose the mutual fund(s). 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.
- 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.
- Consider automation: 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 make a good investment for almost every type of investor, but they are not for everyone. Investors should learn the benefits and risks of mutual funds before investing. Although the basics of mutual funds can be relatively easy to understand, a financial professional can help guide you through the process, including planning, fund selection and account management.
