The decision to invest is relatively easy - you want to save money for future purchases or comfortable retirement, and you want this money to make more money for you. So you decide to invest in it. That's the simple part.
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However, you need to decide what to invest in. You can buy stocks, bonds, mutual funds, bitcoins, collectibles, commodities - the list is still ongoing.
Mutual funds are the best solution in many cases. They are easy to obtain, easy to own and trade, and offer instant diversification. But which mutual fund or fund? In 2023, there were 7,222 mutual funds in the United States, according to Statista. Which one should you choose? Does it matter? How do you decide?
It can be easily assumed that all mutual funds or myriads are the same, but they can vary widely in terms of risk, performance, and expense. Investing in the wrong fund may mean that your time frame is mismatched, which may cause you to withdraw money in a downward market, or it may mean that you end up charging far more than other differences in your fees.
Here are the factors you need to know about determining which investment funds you should choose.
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The first question you ask yourself is what you want to achieve through investment.
Do you want to make enough money so that you can eventually make money from the return without ever touching the principal? You need a relatively active fund to reinvest your dividend.
Do you want your investment to generate income that can be used to supplement your salary? Look for funds made up of dividend stocks.
Do you want something that is almost certain to earn relatively small returns, but the danger of losing money is small? Bond funds may comply with the bill.
The time you plan to invest can change the type of investment you choose.
If your time is short, say three years or less, look for low-risk investments like bond funds. These have guaranteed rates of return so you don't risk withdrawing funds in a downward market.
If you plan to stay invested for 20 years or longer, you can check out stock mutual funds including more volatile investments.
Understanding your risk tolerance is crucial, not only for your investment success, but also for your mental health. If you plan to invest in the long term, you also need to be able to fall asleep at night, so it is important to understand the risks of feeling comfortable.
If you have high risk tolerance and you are willing to invest in more volatile funds, this will inevitably lose money at some point. You need to comfortably watch your portfolio’s value drop (sometimes smaller than the amount you initially invested) and understand that it may increase significantly in the future.
If you are only satisfied with the investment that retains the original investment, then your risk tolerance is low and you should invest accordingly. Your portfolio may grow slowly, but you won't be in a position where the initial investment is at risk.
Mutual fund companies have fees and fees because they need to make money to operate. These fees and expenses may earn a portion of your return on investment, so it is important to understand what you are paying and choose a fund with the right returns and expenses.
Mutual funds will have operating costs, such as investment consulting fees, brokerage fees, marketing fees, guardianship fees, etc. These fees are usually paid from the fund's assets, so you won't see them in your statement.
However, they do reduce your ROI, so you pay indirectly. These expenses are classified as annual fund operating expense categories.
You will also pay sales fees, which is the percentage of the amount you invest, transaction or transaction fee when trading funds, account fees and other fees. These are collectively called shareholder fees.
All these fees and expenses should be outlined in the prospectus received before investing in a specific fund. When you consider the funds you want to invest in, make sure to compare expenses and expenses.
Every investor knows or should-past performance is not a guarantee of future results. In fact, the statement is actually the bottom of every information or marketing article for every investment. This is true.
However, those funds that do well are often well managed by managers who know what they are doing, so high-performance funds may be a better choice, i.e., poorly performed option.
One way to evaluate fund performance is to target benchmarks such as the S&P 500. If you think this comparison is difficult or insufficient, you can invest in an index fund that tracks the S&P 500 or one of many other indexes. You won't beat the benchmark, but your rewards are almost equal.
It is a good idea to understand the differences between various investment funds and how they affect your returns, and you should compare like money before deciding to invest.
But at the end of the day, your return difference is at least between two or more funds that fit your goals, time frames, and risk tolerances, and performance is similar - possibly relatively small. Don't let analysis paralysis stop you from investing.
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This article originally appeared on gobankingrates.com: How important is it to choose which investment fund? (And how to choose a good one)