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Chapter 13 — HOW TO INVEST IN MUTUAL FUNDS
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HOW TO INVEST IN MUTUAL FUNDS

HOW TO INVEST IN MUTUAL FUNDS

To answer how to invest in mutual funds, you need to think, if there is a specific fund you know that you want to invest in, you can buy it by directly contacting the fund company. Otherwise, you may buy through a third party such as banks, brokers, and financial advisors. Just about every mutual fund company also has its own website and information on how to invest in it.

Once you find the desired fund, simply search for the site to find out more information on how to invest in it. If there is a specific fund category or type of fund you want to invest in, you can also search online for it. For example, you could look up “aggressive growth common stock fund” and the search would give you information regarding various funds that meet those requirements.

HOW TO INVEST IN MUTUAL FUNDS

WHICH MUTUAL FUND IS RIGHT FOR ME TO INVEST?

There is an enormous number of mutual funds available for purchase; even more than the number of available stocks. Therefore, investors can always find a fund that is right for them based on their goals, risk tolerance, and strategy. There are 6 basic categories of funds:

Money market funds invest in high quality, short-term instruments such as Treasury bills, certificate of deposits, and commercial paper. These funds contain the least risk but also provide the lowest return.

Bond funds invest in various short, mid, and long-term bonds that provide high returns from interest. These funds are generally riskier than money market funds, and as a result, also generate higher returns.

Income funds focus on providing steady interest payment and dividend income. These funds generally contain a variety of bonds, common stocks, and preferred stocks. These funds are generally riskier and provide higher returns than bond funds.

Balanced funds contain a combination of bonds and common stock that provide stability, capital appreciation, and dividend income. These funds are generally diversified in a way such that an unfavorable condition for common stock would be favorable to bonds, and vice versa.

Common stock funds are the largest category of mutual funds and are entirely invested in equities. These funds generally carry the objective of capital growth mixed with dividend income. Common stock funds can be further divided into funds that specialize in growth stocks and value stocks as well as large cap and small cap companies.

Another category of common stock funds is index funds or funds that serve to match a market index. Special purpose funds often follow a special objective or investment interest. These funds could target stocks in commodities, a specific sector, or a specific region. These funds also utilize derivatives and short selling to meet particular objectives or to help hedge against a bear market.

Quiz

Of the first 5 categories of funds listed, which type generally takes on the highest risk?

Correct
Incorrect
0/76 (0%) Correct
  • 1
    Common stock funds
  • 2
    Balanced funds
  • 3
    Income funds
  • 4
    Bond funds
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