How To Invest in Mutual Funds - NerdWallet (2024)

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Mutual funds are the bedrock of many investment accounts, especially retirement accounts like 401(k)s. Investing in mutual funds is popular in part because they're a relatively hands-off way to invest in many different assets at once — within a single mutual fund, you could gain exposure to hundreds of stocks, bonds or other investments.

Mutual funds are an especially common investment for investors who don't want to pick and choose individual investments themselves, but want to benefit from the stock market's historically high average annual returns.

» View the best-performing mutual funds this month

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How to invest in mutual funds

If you're ready to invest in mutual funds, here is our step-by-step guide on how to buy them.

1. Decide whether you want to invest in active or passive funds

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.

Passive investing is a more hands-off approach and is rising in popularity, thanks in large part to the ease of the process and the results it can deliver. Passive investing often entails fewer fees than active investing. Many passive investors choose index funds or ETFs, which are similar to mutual funds but they aren't professionally managed. This often means they carry lower fees.

» Check out the best index funds

2. Calculate your investing budget

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

How much do mutual funds cost? One appealing thing about mutual funds is that once you meet the minimum investment amount, you can often choose how much money you’d like to invest. Many mutual fund minimums range from $500 to $3,000, though some are in the $100 range and there are a few that have a $0 minimum. So if you choose a fund with a $100 minimum, and you invest that amount, afterward you may be able to opt to contribute as much or as little as you want. If you choose a fund with a $0 minimum, you could invest in a mutual fund for as little as $1.

Aside from the required initial investment, ask yourself how much money you have to comfortably invest and then choose an amount.

Which mutual funds should you invest in? Maybe you’ve decided to invest in mutual funds. 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 may want to have — younger investors typically have more time to ride out riskier assets and the inevitable downturns that happen in the market. 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.

» What’s the right number of funds? Here’s our guide to how many funds to buy

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 could buy directly from the company that created the fund, such as Vanguard or BlackRock, but doing so will limit your choice of funds. You can also work with a traditional financial advisor to purchase funds, but it may incur some additional fees.

Most investors opt to buy mutual funds through an online brokerage, many of which offer a broad selection of 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 may want more variety than that. Some brokers offer hundreds, even thousands, of no-transaction-fee funds to choose from, as well as other types of funds like ETFs.

  • 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.

» NerdWallet's roundup of the best brokers for mutual funds

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How To Invest in Mutual Funds - NerdWallet (4)

4. Understand mutual fund fees

Whether you choose active or passive funds, a company will charge an annual fee for fund management and other costs of running the fund, expressed as a percentage of the cash you invest and known as the expense ratio. For example, a fund with a 1% expense ratio will cost you $10 for every $1,000 you invest.

A fund’s expense ratio isn’t always easy to identify upfront (you may have to dig through a fund’s prospectus to find it), but it's well worth the effort to understand, because these fees can eat into your returns over time.

» How do fees impact returns? Use our mutual fund calculator to find out

Mutual funds come in different structures that can impact costs:

  • Open-end funds: Most mutual funds are this variety, where there is no limit to the number of investors or shares. The NAV per share rises and falls with the value of the fund.

  • Closed-end funds: These funds have a limited number of shares offered during an initial public offering, much as a company would. There are far fewer closed-end funds on the market compared with open-end funds. A closed-end fund’s trading price is quoted throughout the day on a stock exchange. That price may be higher or lower than the fund’s actual value.

Whether or not funds carry commissions is expressed by “loads,” such as:

  • Load funds: Mutual funds that pay a sales charge or commission to the broker or salesperson who sold the fund, which is typically passed on to the investor.

  • No-load funds: Also known as “no-transaction-fee funds,” these mutual funds charge no sales commissions for the purchase or sale of a fund share. This is the best deal for investors, and online brokers often have thousands of choices for no-transaction-fee mutual funds. Most funds available to individual investors are currently no-load.

» Ready to go? View our monthly list of the best mutual funds

5. Manage your mutual fund portfolio

Once you determine the mutual funds you want to buy, you'll want to think about how to manage your investment.

One move would be to rebalance your portfolio once a year, with the goal of keeping it in line with your diversification plan. For example, if one slice of your investments had great gains and now constitutes a bigger share of the pie, you might consider selling off some of the gains and investing in another slice to regain balance.

Sticking to your plan also will keep you from chasing performance. This is a risk for fund investors (and stock pickers) who want to get in on a fund after reading how well it did last year. But "past performance is no guarantee of future performance" is an investing cliche for a reason. It doesn't mean you should just stay put in a fund for life, but chasing performance almost never works out.

Frequently asked questions

Are mutual funds a good investment?

Like any investment, there are good mutual funds and bad mutual funds. But overall, investors are drawn to mutual funds because of their simplicity, affordability and the instant diversification these funds offer. Rather than build a portfolio one stock or bond at a time, mutual funds do that work for you. Also, mutual funds are highly liquid, meaning they are easy to buy or sell.

Are mutual funds safe?

All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.

Can I get rich by investing in mutual funds?

It's definitely possible to become rich by investing in mutual funds — many investors build their entire retirement nest egg by investing in mutual funds. Because of compound interest, your investment will likely grow in value over time. Use our investment calculator to see how much your investment could be worth as time goes on.

Can you lose money in mutual funds?

All investments carry some risk, and you potentially can lose money by investing in a mutual fund. But diversification is often inherent in mutual funds, meaning that by investing in one, you’ll spread risk across a number of companies or industries. Investing in individual stocks or other investments, on the other hand, can often carry a higher risk.

Time is a crucial element in building the value of your investments. If you'll need your cash in five years or less, you may not have enough time to ride out the inevitable peaks and valleys of the market to arrive at a gain. If you need your money in two years and the market drops, you may have to take that money out at a loss. Generally speaking, mutual funds — especially equity mutual funds — should be considered a long-term investment.

Which mutual fund is the best fund to invest in?

That really depends on your own goals, risk tolerance and the rest of your portfolio. However, to get you started, we do have a list of the best-performing mutual funds this month.

How To Invest in Mutual Funds - NerdWallet (2024)

FAQs

How do you successfully invest in mutual funds? ›

If you're ready to start investing in mutual funds, just follow these simple steps and you'll be well on your way:
  1. Calculate your investing budget. ...
  2. Open up tax-advantaged retirement accounts. ...
  3. Pick the right mix of mutual funds. ...
  4. Brush up on mutual fund lingo. ...
  5. Manage your investment portfolio.
Sep 6, 2023

How much money do I need to invest to make $1000 a month? ›

The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets.

How to invest in mutual fund wisely? ›

To invest in mutual funds, you'll want to decide what type of funds match your goals, choose an online brokerage account and research your options, being careful to consider and understand fees.

What if I invest $10,000 in mutual fund? ›

If you start investing Rs 10,000 in an equity mutual fund, you can accumulate Rs 1 crore in 20 years. This is assuming a 12% annual return on your investment.

What does Dave Ramsey say to invest in? ›

What should you invest in inside your 401(k) and Roth IRA? There are many different types of investments to choose from, but Ramsey says mutual funds are the way to go! Mutual funds let you invest in a lot of companies at once, from the largest and most stable to the newest and fastest growing.

Which mutual fund is best for beginners? ›

Overview of the Best Mutual Funds for Beginners
  • Quant Small Cap Fund. ...
  • Quant Infrastructure Fund. ...
  • SBI Tax Advantage Fund-III. ...
  • Quant ELSS Tax Saver Fund. ...
  • Nippon India Small Cap Fund. ...
  • Axis Small Cap Fund. ...
  • Quant Mid Cap Fund. ...
  • ICICI Pru Smallcap Fund.
Mar 28, 2024

How to make $2,500 a month in passive income? ›

With the right strategies, you can create multiple streams of passive income that can add up to a nice amount each month.
  1. Idea 1: Invest in Dividend Stocks. ...
  2. Idea 2: Invest in Real Estate. ...
  3. Idea 3: Rent Out a Property. ...
  4. Idea 4: Invest in Peer to Peer Lending. ...
  5. Idea 5: Build an Online Business. ...
  6. Idea 6: Create an Online Course.
Jul 25, 2023

How to make 1k a month passively? ›

Passive Income: 7 Ways To Make an Extra $1,000 a Month
  1. Buy US Treasuries. ...
  2. Rent Out Your Car. ...
  3. Rental Real Estate. ...
  4. Publish an E-Book. ...
  5. Become an Affiliate. ...
  6. Sell an Online Course. ...
  7. Bottom Line.
Mar 29, 2023

How much do I need to invest to make $2000 a month? ›

Earning $2,000 in monthly passive income sounds unbelievable but is achievable through dividend investing. However, the investment amount required to produce the desired income is considerable. To make $2,000 in dividend income, the investment amount and rate of return must be $400,000 and 6%, respectively.

How can I make money fast with mutual funds? ›

How do I make money with mutual funds? If you own a mutual fund, you're considered a shareholder. You can make a profit from your investments in one of two ways: through dividends or capital gains. Dividends are a reward to shareholders for holding onto certain stocks or mutual funds for the long term.

What is a good amount to put in a mutual fund? ›

“Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine. The important part is that you actually start.”

Which mutual fund is best to invest now? ›

Top-performing mid-cap mutual funds in India
  • PGIM India Midcap Opportunities Fund- 27.12.
  • Edelweiss Mid Cap Fund- 25.89.
  • Baroda BNP Paribas Midcap Fund- 24.87.
  • HDFC Mid-Cap Opportunities Fund- 24.75.
  • Kotak Emerging Equity Fund- 24.22.
  • SBI Magnum Midcap Fund - 24.09.
  • Invesco India Mid Cap Fund-24.08.
6 days ago

What is the 8 4 3 rule? ›

What is the 8-4-3 rule of compounding? In the 8-4-3 strategy, the average return of a particular investment amount for 8 years is 12 per cent/annum, while after that time period, it will take only half of that horizon, i.e., 4 years (total 12 years), to get a return of 12 per cent.

How much can 10k grow in 10 years? ›

How much money you can make by investing $10,000
YearReturnEnding balance
1$800$10,800
5$4,693$14,693
10$11,589$21,589
20$36,610$46,610
1 more row
Oct 1, 2023

What is SIP 5000 per month for 20 years? ›

If someone begins a SIP of 5000 per month for a span of 20 years, at 12% assumed annualized rate of return per annum, your total investment in 20 years is Rs. 12 lakh and the accumulated corpus at the end of tenure is close to Rs. 50 lakhs.

What is the best investment strategy in mutual fund? ›

The ideal strategy is to make equity investments along with short term investment holdings to maintain the liquidity of their portfolio. Thus, investing in debt funds will help an investor meet emergency requirements in cash without sacrificing their long-term opportunities to get higher returns.

What are 3 ways to make money with mutual funds? ›

Investors in the mutual fund may make a profit in three ways:
  • The fund may earn interest and dividend payments from its holdings.
  • The fund may earn capital gains from selling assets held in the fund at a profit.
  • The fund may appreciate, meaning each fund share will grow in value over time.
Apr 3, 2024

What is a good amount to invest in mutual funds? ›

To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.

How do you get good returns on mutual funds? ›

Diversify Your Portfolio: Diversification plays a crucial role in risk reduction, optimising returns, and maintaining stability within your investment portfolio. It is important to invest in a mix of equity, debt, and possibly others like gold or real estate mutual funds to diversify your portfolio.

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