When researching investments, you have probably come across so-called mutual funds.
But do you really know why they are so talked about?
Here, we will understand some points that make this option an important subject for those who want to diversify their investment portfolio.
What are mutual funds?
When researching investments, you’ve probably come across mutual funds, but do you know what they are? That’s what you’ll find out here.
This is a type of investment that can be very worthwhile so you can diversify your investment portfolio.
Definition and purpose
Mutual funds are investments in which several investors make joint contributions, forming a highly diversified portfolio.
Basically, this is a type of investment whose proposal is to be a cheap and practical option to start diversifying your investments.
All this with good profitability, because it’s not just your money being invested; you will also have other investors making contributions.
How mutual funds differ from other investments
There are many differences between mutual funds and other investments; for example, we can mention their diversification.
That’s because there are mutual funds for all tastes, from beginners who are still learning how to deal with risks to advanced investors.
However, the main differentiator of this type of investment is the ability to invest together with other investors, combining contributions.
Types of mutual funds
As mentioned before, there are very different investment funds, which greatly affects the choice. Therefore, we’ll show you below the main types of funds.
Equity funds
The first type of mutual fund is the equity fund—investments most people are already quite familiar with.
In this type of fund, you can invest in stocks even without having much experience, which is why many people use such funds as an initial gateway.
Bond funds
This option is much less volatile than the one mentioned above, mainly because it’s a fixed-income option, while stocks belong to variable income.
With these investments, you’ll have the possibility of investing in public debt securities or even corporate funds.
Index funds vs. Actively managed funds
Starting with index funds, they replicate the s & p 500 financial index, being a way to invest with lower fees.
Meanwhile, the second option aims to outperform the market; however, it still has higher fees.
How to start investing in mutual funds
For you to start investing in mutual funds, it’s important that you follow some steps, as you will see below.
Choosing the right fund based on goals
Have you ever stopped to think about your financial goals? Whatever they are, you can be sure they are quite different from what many other investors have.
For this reason, choosing a mutual fund should be done carefully so that you can fulfill your financial plans.
Understanding expense ratios and fees
Each type of investment fund has completely different fees, which also applies to minimum investments.
Therefore, it’s important that you take some time to analyze, based on your financial situation, which fund is most recommended for you.
How to open an investment account
Finally, you’ll need to open an investment account. To do this, look for a trustworthy brokerage and provide your personal and financial data.
Pros and cons of mutual funds
Like any other investment, this type of fund also has advantages and disadvantages, as you’ll see below:
Benefits of diversification
Firstly, we have the advantages of diversification. It’s always good to have a wide variety of investments.
In mutual funds, it’s possible for you to make contributions in both fixed income and variable income.
Common drawbacks and risks
If on the one hand its diversification is quite favorable, this type of investment is quite risky when it comes to fees.
In some cases, you may end up not having such adequate returns due to the high interest rates in some mutual funds.
Maintaining your mutual fund portfolio
To keep your funds in your investment portfolio, it’s important that you follow some tips, as we’ll show below:
Monitoring performance
Whether in fixed income or variable income, this is an investment that will have better or worse returns depending on certain factors.
By keeping an eye on its performance, you will always be aware of whether or not you need to change something in your investments.
Rebalancing strategies
As we’ve just mentioned, it may be necessary to change something in your investment portfolio, which is the purpose of analyzing mutual funds.
Rebalancing can happen in different ways, for example, by making more contributions to other types of mutual funds.
Tips for beginners
Lastly, we have two tips that can be very useful for you—follow our recommendations for beginners.
Starting small and building over time
When it comes to investing, the ideal is always to start with small amounts, to later invest larger amounts.
This not only reduces the risk of having losses but also allows you to set up and test the best strategies for your situation.
Utilizing financial advisors or robo-advisors
You don’t have to make all your investments on your own—there are financial advisors and specialized robots to help you with this type of investment.
Therefore, don’t forget to check which of these options fits your budget in the most comfortable way; it can greatly increase your profitability.
Conclusion
For many, investing in mutual funds may be the best decision as an investor; however, it all depends on what you’re looking for in an investment.
Therefore, it’s important to carefully analyze the options mentioned in this article and your objectives as an investor.