Many investors advocate for the benefits of mutual funds, and they actively choose to invest some of their money into their choice of funds on a regular basis. Mutual funds are essentially a diversified portfolio of stocks, bonds, CDs, and other assets. Some funds may be heavily weighted in stocks, and some may be weighted in a specific sector of the stock market. Others may have greater holdings in municipal bonds or short or long-term CDs.
While mutual funds are generally considered less risky to own than individually purchased stock shares, the fact is that the type of funds you purchase will affect your return and your exposure. By selecting the right investment strategy for your goals, you can more successfully take advantage of the benefits these funds provide.
Understand Your Goals
There are numerous mutual funds that you can invest in. Some of the funds with the greatest historical return may be heavily weighted in stocks. These are more suitable for investors with the ability to accept more risk, such as younger investors who are decades away from retirement. Other mutual funds have a concentration of long-term CDs that will mature in a number of years, and they could be suitable for balancing out your high-risk investments with a more stable return. When you understand what your investment goals are, you can more suitably select funds that are right for you.
Diversify Your Holdings
Some investors will choose to invest all of their funds into a single mutual fund. While a mutual fund may be a diversified investment in itself, you can actually use mutual funds strategically to more effectively diversify your holdings while also decreasing risk and maximizing return. Before you invest in a fund, review its historical return as well as its allocation of holdings. When you own a fund that is 20 percent invested in CDs, you essentially are investing 20 percent of your funds into CDs. For each fund that you purchase, pay attention to the allocation of holdings, and diversify your own investments to accommodate your risk tolerance and expected return on investment.
Most investors will want to avoid investing heavily in funds that are weighted heavily in one specific type of investment or one specific area of the stock market. For example, if you purchased a fund that is weighted 50 percent in technology stocks, you may want to diversify this with an investment in a fund weight in another sector of the stock market or in other types of investments.
How Much to Invest
Mutual funds may be less risky to invest in than stocks, but there is still risk associated with this investment. Therefore, even if you invest in mutual funds weighted in less risky vehicles like CDs and bonds, you should invest your own resources in less risky investments as well. For example, you may choose to purchase a 5-year CD through a local bank to balance your investment in mutual funds. When your own portfolio and selection of mutual funds are balanced, you can confidently invest the funds you have available.
Your investment strategy with mutual funds may change over the years as your portfolio grows and you approach retirement. The best mutual funds strategy is one that is focused on your own goals and risk tolerance, and balanced according to your goals.