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How to Invest in Mutual Funds

Mutual funds are the big-box stores of the investing world, buying in bulk to pass along a wide range of products at affordable prices.

The benefit is clear: A mutual fund pools the money from thousands of investors and, on their behalf, invests it across a wide range of asset types, industries, geographies and more — it’s diversification at a fraction of the cost.

» Want to cut to the chase? See our picks for the best brokers for mutual funds.

Buying a mutual fund in 5 steps

  1. Decide whether to go active or passive. Costs and performance often favor passive investing.
  2. Calculate your budget. Funds may track well-known indexes like the S&P 500 or specific industries or types of companies.
  3. Decide where to buy mutual funds. Find the right fund for your budget.
  4. Understand and scrutinize fees. A broker that offers no-transaction-fee mutual funds can help cut costs.
  5. Build and manage your portfolio. Check in on and rebalance your mix of assets once a year.

Step 1. Decide whether to go active or passive

Your first choice is perhaps the biggest: Do you want to beat the market or try to mimic it? It’s also a fairly easy choice: One approach costs more than the other, often without delivering better results.

Actively managed funds are managed by professionals who research what’s out there and buy with an eye toward beating the market. While some fund managers might achieve this in the short term, it has proved difficult to outperform the market over the long term and on a regular basis. These funds are more expensive because of the human touch involved.

A more hands-off approach called passive investing is rising in popularity, thanks in large part to the ease of the process and the results it delivers. Passive investing is best for most people because the funds are cheaper and there are fewer fees.

Passive investing is best for most people because the funds are cheaper and there are fewer fees.

Perhaps the signature passive investment is the index fund, which buys a basket of securities meant to represent an entire market. For example, the holdings in a Standard & Poor’s 500 fund mirror those in the popular index of 500 stocks, and the fund’s performance is meant to replicate the performance of the index itself. So when the evening news says the S&P 500 was up 3% for the day, so would your index fund. And since there’s no real management going on, its fees are lower than for an actively managed fund.

» Want to know about passive investing involving robo-advisors? Learn more about this automated way to manage your portfolio

Step 2. Calculate your budget

When considering how much to invest, remember that patience pays. A good rule of thumb is you should feel comfortable leaving the money untouched for at least five years to ride out any market downturns.

Thinking about your budget in two ways can help determine how to proceed:

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  • How much do I need to get started? Mutual fund providers often require a minimum amount to open an account and begin investing. Some brokers have no account minimum; others can range from $500 to $3,000.
  • How should I invest that money? As mentioned earlier, the great advantage of mutual funds is the low-cost way they offer to build a diverse portfolio across stocks (for growth) and bonds (for lower but steadier returns). But what initial mix of funds is right for you? Generally speaking, the closer you are to retirement age, the more holdings in conservative investments you will want to have — younger investors have more time to ride out riskier bets and inevitable reversals. One kind of mutual fund takes the guesswork out of the “what’s my mix” question: target-date funds, which automatically reallocate your asset mix as you age.

» Have a small amount to work with? Here’s how to invest $500

Step 3. Decide where to buy mutual funds

You need a brokerage account when investing in stocks, but you have a few options with mutual funds. If you contribute to an employer-sponsored retirement account, such as a 401(k), there’s a good chance you’re already invested in mutual funds. You also can buy directly from the company that created the fund, such as Vanguard or BlackRock Funds. But each of these options may have a limited choice of funds.

Most investors would be wise to buy from an online brokerage, many of which offer a broad selection of mutual funds across a range of fund companies. If you go with a broker, you’ll want to consider:

  • Affordability. Mutual fund investors can face two kinds of fees: from their brokerage account (transaction fees) and from the funds themselves (expense ratios and front- and back-end “sales loads”). More on these below.
  • Fund choices. Workplace retirement plans may carry only a dozen or so mutual funds. You want more variety than that. Some brokers offer hundreds, even thousands, of no-transaction-fee funds to choose from. There are many other types of funds available, such as exchange-traded funds, or ETFs, which offer the diversification benefits of mutual funds but can be traded like individual stocks; and target-date funds, which invest in other mutual funds and reallocate their assets to become more conservative over time.
  • Research and educational tools. With more choice comes the need for more thinking and research. It’s vital to pick a broker that helps you learn more about a fund before investing your money.
  • Ease of use. A brokerage’s website or app won’t be helpful if you can’t make heads or tails of it. You want to understand and feel comfortable with the experience.

» Ready to start investing?
Here are some picks from our roundup of the best brokers for mutual-fund investors.

6 Easy Ways To Start Investing With Little Money

Modified date: April 6, 2020

I’m here to tell you: You don’t need to be the Wolf of Wall Street to start investing. It’s okay if you’re more of a mouse of Main Street. Even if you only have a few dollars to spare, your money will grow with compound interest.

The key to building wealth is developing good habits—like regularly putting money away every month. Swap out the barista-made cappuccinos for coffee at home and you could already be saving more than $50 a month.

Once you have a little money to play with, you can start to invest.

In 2020, you can get a date, a ride or a pizza with the swipe of a smartphone screen. Investing is no different. If you can automate your bills, why not your investments? It’s just as easy.

With a robo-advisor, you can make your money work while you play. And just like Halloween costumes, investing comes in many different forms. It shouldn’t be a scary word.

Whether it’s opening a savings account, investing in your retirement or the real estate market, investing for beginners is simpler and more straightforward than ever before.

Soon you’ll see how addictive growing your money can be.

Here are six simple ways to get there:

Saving money and investing it are closely connected. In order to invest money, you first have to save some up. That will take a lot less time than you think, and you can do it in very small steps.

If you’ve never been a saver, you can start by putting away just $10 per week. That may not seem like a lot, but over the course of a year, it comes to over $500.

Try putting $10 into an envelope, shoebox, a small safe, or even that legendary bank of first resort, the cookie jar. Though this may sound silly, it’s often a necessary first step. Get yourself into the habit of living on a little bit less than you earn, and stash the savings away in a safe place.

Discover Bank currently offers a strong 1.50% APY on their online savings account. There is no minimum deposit required and no monthly maintenance fees (or other fees) associated with a Discover Bank online savings account so the yield is earned on all balances.

The brand also offers high-yield CD’s, checking and money market accounts so if you want to diversify your deposits portfolio a little bit, Discover Bank has a lot of what you need.

The electronic equivalent of the cookie jar is the online savings account; it’s separate from your checking account. The money can be withdrawn in two business days if you need it, but it’s not linked to your debit card. Then when the stash is large enough, you can take it out and move it into some actual investment vehicles.

Start with small amounts of money, and then increase as you get more comfortable with the process. It may be a matter of deciding not to go to McDonald’s or passing on the movies, and putting that money into the cookie jar instead.

Prefer that money to be invested right away? Consider an online discount broker like You Invest by J.P. Morgan. You Invest offers fee-free stock trades, fee-free options trades and fee-free ETF trades. Plus, they’re also offering up to a $625 cash bonus for new accounts.

You can link your Chase You Invest account to the variety of other Chase products (deposits, mortgages, credit cards etc.) so that all of your important financial accounts are in the same place.

2. Let a robo-advisor invest your money for you

Robo-advisors were created to make investing as simple and accessible as possible. No prior investment experience is required and set-up is easy. Let their automated intelligence track your investments in the background, and pay lower fees in the process.

Wealthfront

A robo-advisor that I highly recommend to first-time investors is Wealthfront. Their fees are reasonable at 0.25%, but the kicker is that you can get your first $5,000 managed free (specific to MU30 readers).

So if you’re looking to start investing with little money, Wealthfront could be the way to go. You will need $500 to get started though with Wealthfront so keep that in mind.

M1 Finance

If you don’t have that $500 starting balance, there are still great options for you in the Robo-advising space. M1 Finance charges no commissions or management fees, and their minimum starting balance is just $100.

You can choose from one of their pre-made diversified portfolios or customize your own by purchasing stocks and ETFs through their platform. The user interface is super easy to use.

Betterment

If you’re starting out with less than $100, you may want to consider Betterment, which has no minimum starting balance whatsoever. Like M1, it’s also great for beginners as it provides a super simple platform and a hassle-free approach to investing.

3. Make your first steps in real estate market

Real estate investing does not have to be for the very rich. There are many options for real estate crowdfunding and though this may seem like something you’d be nervous about looking into – it actually can be an intriguing investment.

With Fundrise’s really easy-to-use online platform, you simply need a starting minimum investment of $500. So if you’re an unaccredited investor, you can buy properties without paying those very large fees that end up being a deal-breaker if you want to start dabbling in real estate. By managing your own portfolio, the fees come to just 1% and Fundrise always offers a 90 days satisfaction guarantee.

4. Enroll in your employer’s retirement plan

If you’re on a tight budget, even the simple step of enrolling in your 401(k) or other employer retirement plan may seem beyond your reach. But there is a way that you can begin investing in an employer-sponsored retirement plan with amounts that are so small you won’t even notice them.

For example, plan to invest just 1 percent of your salary into the employer plan.

You probably won’t even miss a contribution that small, but what makes it even easier is that the tax deduction that you’ll get for doing so will make the contribution even smaller.

Once you commit to a 1 percent contribution, you can increase it gradually each year. For example, in year two, you can increase your contribution to 2 percent of your pay. In year three, you can increase your contribution to 3 percent of your pay, and so on.

If you time the increases with your annual pay raise, you’ll notice the increased contribution even less. So if you get a 2 percent increase in pay, it will effectively be splitting the increase between your retirement plan and your checking account. And if your employer provides a matching contribution, that will make the arrangement even better.

Blooom is a great tool for hands-off investment management of your 401(k). They’ll give you a free 401(k) analysis, telling you where and how they can optimize your investments. Check out our review of Blooom; if you decide to use their services, you’ll be charged a reasonable $10 per month.

And Blooom has got a special promotion right now: get $15 off your first year of Blooom with code BLMSMART

5. Put your money in low-initial-investment mutual funds

Mutual funds are investment securities that allow you to invest in a portfolio of stocks and bonds with a single transaction, making them perfect for new investors.

The trouble is many mutual fund companies require initial minimum investments of between $500 and $5,000. If you’re a first-time investor with little money to invest, those minimums can be out of reach. But some mutual fund companies will waive the account minimums if you agree to automatic monthly investments of between $50 and $100.

Automatic investing is a common feature with mutual fund and ETF IRA accounts. It’s less common with taxable accounts, though its always worth asking if it’s available. Mutual fund companies that have been known to do this include Dreyfus, Transamerica, and T. Rowe Price.

An automatic investing arrangement is particularly convenient if you can do it through payroll savings. You can typically set up an automatic deposit situation through your payroll, in much the same way that you do with an employer-sponsored retirement plan. Just ask your human resources department how to set it up.

6. Play it safe with Treasury securities

Not many small investors begin their investment journey with US Treasury securities, but you can. You’ll never get rich with these securities, but it is an excellent place to park your money—and earn some interest—until you are ready to go into higher risk/higher return investments.

Treasury securities, also known as savings bonds, are easy to buy through the US Treasury’s bond portal Treasury Direct. There you can buy fixed-income US government securities with maturities of anywhere from 30 days to 30 years in denominations as low as $100.

You can also use Treasury Direct to buy Treasury Inflation Protected Securities, or TIPS. These not only pay interest, but they also make periodic principal adjustments to account for inflation based on changes in the consumer price index.

And as is the case with mutual funds, you can also arrange to have your Treasury Direct account funded through payroll savings.

Bonus idea – Consider a 5% return with Worthy Bonds

For as little as $10, you can invest in Worthy Bonds. Worthy Bonds are fixed interest bonds that fund loans for creditworthy American businesses. The bonds have a term of 36-months, but interest is paid weekly and you can withdraw your money at ANY time, without penalty. Buy as many $10 bonds as you’d like.

The simple idea is that Worthy is going to take the money you use to buy bonds and invest it into companies with a greater return than 5%. They win, you win and it’s a fixed rate so you know the rate of return every day.

The platform is open to all U.S. investors and can be a great way to diversify your portfolio with a low-risk solution. Worthy only invests in fully secured loans (liquid assets having a value significantly greater than the loan amount), so the quality of loan and investment is always high caliber.

Summary

There are plenty of ways to start investing with little money, with many online and app-based platforms making it easier than ever. All you have to do is start somewhere. Once you do, it will get easier as time goes on, and your future self will love you for it.

Read more

Start Investing with Little Money

  • Recommended Wealthfront requires a $500 minimum investment, but charges no fees until your balance grows to $10,000 or more. Visit Site

No Minimum Low-fee roboadvisor with no minimum investment. Creates fully-automated portfolios based upon your desired allocation. Visit Site

$100 Minimum M1 Finance gives you the benefits of a robo-advisor with the control of a traditional brokerage. M1 charges no commissions or management fees, and their minimum starting balance is just $100. Visit Site

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