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How to Get Started Investing With Mutual Funds

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Investing with mutual funds begins before money is invested; it is a goal-oriented planning process. What is it that you would like to accomplish with your savings? Do you have specific goals, such as saving for retirement, or do you have some broadly defined goals, such as the accumulation of wealth for the general purpose of strengthening your financial security? What is your time horizon? One year? Five years? 10 years?

Having a goal in mind for your investments will aid in making related investing decisions, such as the mutual fund types to choose, tax considerations and how much money it will take to get started.

Difficulty: Average
Time Required: 4 Hours

Here's How:

  1. Find the Right Type of Mutual Fund

    There are many different types of mutual funds but all you need to know to begin is the three basic types: stock funds, bond funds and money market funds. There are also hybrids, usually called balanced funds, which invest in some combination of the three basic types.

    Generally, stock mutual funds are appropriate for long-term periods (more than 10 years); bond funds are appropriate for intermediate-term periods (5 to 10 years); and money market funds are appropriate for short-term periods (less than 3 years). Other than time horizon, you will want to know and understand your risk tolerance.

  2. Consider Taxes

    The taxation of mutual funds depends upon which type of investment account you use:

    Tax-Advantaged Accounts: These include the Individual Retirement Account (IRA, Roth IRA) and 401(k). You will not pay any taxes on earnings or dividends until you make a withdrawal. In some cases withdrawals are tax-free, if certain requirements are met.

    Taxable Brokerage Accounts: These are also called regular brokerage accounts or individual brokerage accounts. You will pay capital gains tax on the gains and ordinary income tax on dividends, if applicable.
  3. Buy a Mutual Fund

    Now you are ready to make the initial investment with a mutual fund company or discount brokerage firm. Mutual funds require a minimum initial investment amount, which is often $3,000 or more. There are, however, a few good mutual fund companies, such as TIAA-CREF and Vanguard that have funds with low minimums of $500 and $1,000 respectively. You may also consider Fidelity Investments and Charles Schwab.

Tips:

  1. If you commit to an automatic investment plan, where you invest at least $100 per month, you may get started investing at a lower initial investment amount.
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