Are mutual funds right for you?
Mutual funds can put your investments on autopilot and take away the need to do extensive stock research. Mutual fund investing also adds portfolio diversification. After all, many mutual funds invest in hundreds, or even thousands, of different stocks or bonds. Your performance won’t be too dependent on any single one.
Who should invest in mutual funds?
Mutual fund investing is best suited for:
- Investors who want to leave the research and evaluation of stocks to someone else.
- Investors who don’t want to constantly monitor their investments. Mutual funds are designed for investors with a set-it-and-forget-it mindset.
- Investors who want an all-in-one portfolio of stocks and don’t want too much of their money dependent on any one company’s performance.
- Investors who don’t want to worry about intraday fluctuations in the value of their investments, as mutual funds only trade once a day.
Some people see robo-advisors as a cheaper alternative to mutual funds, as they’re also a hands-off way to invest. In this scenario, the robo-advisor’s algorithms automate your investments according to your risk tolerance and other factors.
Should you invest in index funds or actively managed mutual funds?
There are two main types of mutual funds:
- Actively managed: These funds employ fund managers to choose investments they expect to produce the best returns for investors.
- Passively managed: These funds aim to track a certain benchmark index, such as the S&P 500.
Although these are both technically mutual funds, people often refer to actively managed funds as “mutual funds” and passively managed funds as “index funds.”
The aim of actively managed funds is to beat the performance of an index. Fund managers make decisions to buy and sell stocks with the money in a fund based on their expectations of a stock’s (i.e., a company’s) performance.
That’s not to say actively managed mutual funds will always beat their respective benchmarks. In fact, numerous studies have shown the majority of actively managed mutual funds don’t do any better than index funds. Some have excellent track records, but it’s important to do your homework before investing.
Passively managed funds are also referred to as “index funds” because they are set up to mimic the performance of an entire stock index. For example, an S&P 500 index fund would own the stocks of all 500 companies in that index, in weightings that would produce returns that match those of the index.
Once you’ve decided mutual fund investing is right for you, the next step is to decide which of the two categories is the better fit for your financial goals. (Hint: For many investors, index funds can be a safer bet. Actively managed funds tend to have significantly higher fee structures than index funds, so it’s important to be sure you’re getting your money’s worth.)