Mutual Funds In Your 20S: A Guide To Getting Started

Investing in mutual funds is a great way to build wealth over time and achieve financial goals, such as buying a house or retiring comfortably. Mutual funds are baskets of stocks, bonds, or other securities, that make it easy to build a diversified investment portfolio. They are also relatively cheap and simple to invest in, thanks to the many trading apps and online brokerages available today.

1. Set clear investing goals: Identify what you are investing for. Are you saving for retirement, buying a home, or planning for a child's education? Knowing your goals will help you determine the right investment strategies and account types.

2. Choose an account type: You can open a standard brokerage account through an investment company or bank. If your employer offers a retirement account, such as a 401(k), you may already be invested in mutual funds. You can also consider opening a traditional or Roth IRA for tax-advantaged retirement savings.

3. Decide on your asset mix: Determine how much of your portfolio you want to invest in stocks, bonds, or other holdings. If you are in your 20s, a stock-heavy allocation is generally recommended, as you can afford to take on more risk.

4. Pick an investment strategy: Decide whether you want to actively pick market-beating stocks or aim for returns that match the market. Active funds employ fund managers to actively select stocks and bonds, while passive funds aim to deliver returns that match market benchmarks.

5. Research mutual fund companies: Familiarize yourself with different mutual fund companies, such as Vanguard or Fidelity, and consider their fees, performance, and regulatory history.

6. Research specific mutual funds: Once you've chosen a fund provider, study their menu of options and consider factors such as fees, historical performance, and investment strategies.

7. Open an investing account: After deciding on your investment strategy and researching specific funds, it's time to open an account and start buying mutual fund shares.

8. Be a long-term investor: Don't try to time the market. Focus on your long-term investment goals and stick to your plan, even during market ups and downs.

9. Consider the tax implications: Keep in mind that investing in mutual funds may have tax consequences, such as capital gains taxes or dividends. Consult with a tax professional to understand the tax implications of your investments.

Understand the basics of personal finance

Personal finance is an important aspect of investing in mutual funds in your 20s. Here are some key points to help you understand the basics:

• Set clear financial goals: Determine your short-term, intermediate, and long-term financial goals. This could include saving for emergencies, buying a home, retirement, or other investments. Having clear goals will guide your investment strategies and help you stay focused.
• Create a budget: Understand your income and expenses to create a realistic budget. This will help you allocate your money effectively and identify areas where you can cut back on spending.
• Start saving early: Time is a crucial factor in investing. The earlier you start saving and investing, the more time your money has to grow through compound interest. Take advantage of the power of compounding by investing regularly, even if you're starting with small amounts.
• Automate your savings: Set up automatic transfers from your paycheck or monthly income to your savings and investment accounts. This helps you save consistently and reach your financial goals faster.
• Build an emergency fund: It's important to have a cushion for unexpected expenses. Aim to save enough to cover at at least three to six months' worth of living expenses in a high-yield savings account or money market account.
• Understand investment options: Educate yourself about the different investment options available, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. Each option has its own risks and potential rewards, so it's essential to understand them before investing.
• Diversify your portfolio: Don't put all your eggs in one basket. Diversifying your investments across different asset classes, sectors, and industries can help reduce risk and smooth out market fluctuations.
• Consider working with a financial advisor: If you're new to investing, consider seeking advice from a financial advisor. They can help you navigate the complex world of investing, provide personalized recommendations, and ensure your investments align with your financial goals.
• Monitor your investments: Regularly review the performance of your investments and make adjustments as needed. Stay informed about market trends and economic conditions that may impact your portfolio. Remember that investing is a long-term commitment, and short-term market fluctuations are normal.
• Understand the fees: Investment fees can eat into your returns over time. Be mindful of expense ratios, sales charges, redemption fees, and other account fees associated with mutual funds. Compare fees across different investment platforms to find the most cost-effective options.

Learn about different types of mutual funds

There are many different types of mutual funds, each with its own investment focus and strategy. Here is an overview of some of the most common types:

• Stock Mutual Funds: These funds invest principally in equity or stocks. Within this group, there are several subcategories, such as funds that focus on small-, mid-, or large-capitalization companies, or those that follow an aggressive growth, income-oriented, or value investment approach.
• Bond Mutual Funds: Bond mutual funds focus on investments that pay a set rate of return, such as government bonds, corporate bonds, and other debt instruments. These funds aim to provide a stable rate of return with limited investment risk.
• Money Market Mutual Funds: These funds invest in safe, short-term debt instruments, such as government Treasury bills. The returns are typically low, but these funds are considered low-risk.
• Index Mutual Funds: Index funds aim to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average (DJIA). They are passively managed and have lower fees than actively managed funds.
• Balanced Funds: Balanced funds, also known as asset-allocation funds, invest across different types of securities, such as stocks, bonds, the money market, or alternative investments. The goal of these funds is to reduce risk through diversification.
• Income Funds: Income funds are designed to provide a steady income stream, making them popular for retirement investing. They primarily invest in government and high-quality corporate debt, holding these bonds until maturity to provide regular interest payments.
• International and Regional Mutual Funds: International funds invest only in assets outside of the investor's home country, while global funds can invest anywhere in the world. Regional funds focus on a specific geographic region, such as a country, continent, or group of countries.
• Sector and Theme Mutual Funds: Sector funds aim to profit from the performance of specific sectors of the economy, such as finance or technology. Theme funds cut across sectors, focusing on a particular theme or trend, such as AI or green technology.
• Socially Responsible Mutual Funds: These funds only invest in companies and sectors that meet certain criteria, such as environmental, social, or governance (ESG) factors. Sustainable mutual funds, for example, focus on green technology and recycling.

Research and compare funds

Researching and comparing mutual funds can be more challenging than for other securities. Unlike stocks, mutual funds do not offer investors the opportunity to compare the price-to-earnings (P/E) ratio, sales growth, earnings per share (EPS), or other important data. However, there are still several factors you can consider when researching and comparing mutual funds.

Fees and Expenses

Mutual funds charge annual fees, expense ratios, or commissions, which lower their overall returns. Therefore, one of your first moves should be to check out these costs, typically quoted as a percentage of your overall investment, known as the expense ratio. Given the average expense ratio for an active fund is 0.6% and for a passively managed one, it's 0.12%, you should look for funds with fees at or lower than these levels.

Historical Performance

You can easily find a fund's historical performance record on the fund's website or via a research firm. While past performance doesn't guarantee future results, it can give you an idea of how the fund has done over different periods and in different market environments.

Investment Strategy

Mutual funds that try to beat the market are known as "active" funds. They employ a fund manager (and sometimes whole teams of them) to research and pick out stocks and bonds that will outperform. In contrast, passive funds take a more hands-off approach and aim to deliver returns that match market benchmarks. Passive funds tend to be cheaper, with lower average costs than active funds.

Fund Company

There are many different companies that offer mutual funds, and if you don't have a 401(k) that limits your options, you'll have to decide on the companies yourself. Some of the largest mutual fund companies include Vanguard, Fidelity, and American Funds (owned by Capital Group).

Fund Options

Once you've picked a fund provider, it's time to study its menu of options. Fund companies often offer dozens of choices, and it can be hard to tell them apart at first glance. Keep in mind that many investors like to break the stock and bond markets into small pieces, then mix and match. So, once you decide what kind of fund you want (e.g., a passive fund that mimics the broad US stock market or an active fund that targets international stocks), the choices will become more manageable.

Fund Screeners

Fund screeners are online tools that help you sort and search for funds. These tools, provided by investment companies, should be a big help in narrowing down your options and finding funds that match your goals and risk tolerance.

Set up a brokerage account

Setting up a brokerage account is a crucial step in investing in mutual funds. Here's a detailed guide on how to do it:

Step 1: Determine your investment goals

Before setting up a brokerage account, it's important to understand your investment goals. Are you investing for the short term or the long term? Do you have specific financial milestones in mind, such as buying a house or retiring comfortably? Clarifying your goals will help you choose the right type of brokerage account and investment strategy.

Step 2: Choose the right brokerage firm

When selecting a brokerage firm, consider factors such as fees, investment options, research tools, and ease of use. Reputable firms like Fidelity and TD Ameritrade offer a wide range of investment choices and user-friendly platforms. Compare different firms to find one that aligns with your goals and preferences.

Step 3: Open your brokerage account

Once you've chosen a brokerage firm, it's time to open your account. This usually involves filling out an application form and providing personal information, such as your Social Security number and date of birth. Some brokers may also ask about your investment experience and employment details. This step is crucial, as it sets the foundation for your investing journey.

Step 4: Fund your account

After opening your brokerage account, you'll need to fund it. Decide on the amount you want to invest initially and choose from the available funding options provided by the brokerage firm. This could be through electronic transfers, cheque deposits, or other methods. Make sure you understand any minimum deposit requirements and associated fees.

Step 5: Research and select mutual funds

With your funded brokerage account, it's now time to choose the specific mutual funds you want to invest in. Evaluate different funds based on their investment strategies, fees, historical performance, and risk profile. Utilise the research tools and fund screeners provided by your brokerage firm to make informed decisions.

Step 6: Place your first trade

Once you've identified the mutual funds that align with your goals and risk tolerance, it's time to place your first trade. Decide on the amount you want to invest in each fund and submit your trade orders through your brokerage platform. You may also set up automatic recurring investments if you plan to invest regularly.

Step 7: Monitor and adjust your portfolio

Investing in mutual funds is typically a long-term strategy. However, it's important to periodically review the performance of your investments and make adjustments as needed. Stay informed about market trends and keep an eye on how your chosen mutual funds are performing. Remember that investing involves risks, and the value of your investments may fluctuate.

By following these steps, you'll be well on your way to successfully investing in mutual funds through a brokerage account. Remember to always do your own research, understand the associated fees and risks, and make decisions that align with your financial goals and risk tolerance.

Decide on an investment strategy

When deciding on an investment strategy, it is important to consider your goals, risk tolerance, and the specific accounts you will be using. Here are some key points to help you decide on an investment strategy for mutual funds:

• Set clear goals: Determine what you are investing for. Are you saving for retirement, buying a home, or planning for short-term goals like a wedding or vacation? Setting clear goals will help you choose the right investment strategy and account type.
• Decide on your risk tolerance: Consider your tolerance for risk and how you will react if your investments perform poorly. Your risk tolerance will influence the types of assets you invest in and the level of risk you are willing to take.
• Choose an account type: You can invest in mutual funds through a standard brokerage account, a retirement account such as a 401(k) or IRA, or a taxable brokerage account. The choice will depend on your specific goals and tax considerations.
• Determine your asset allocation: Decide on the right mix of stocks, bonds, and other holdings for your portfolio. If you are in your 20s, a stock-heavy allocation is generally recommended, as you have a longer time horizon and can take on more risk. However, it's important to consider your risk tolerance and investment goals when determining your asset allocation.
• Active vs. passive investing: Decide whether you want to actively pick market-beating stocks or aim for returns that match the market. Active investing involves higher fees and may not always outperform passive investing, which takes a more hands-off approach and often comes with lower fees.
• Research mutual fund companies and funds: Look into different mutual fund companies, such as Vanguard or Fidelity, and compare their offerings. Consider factors such as fees, performance, and investment strategies when selecting a mutual fund company and specific funds to invest in.
• Consider working with a financial advisor: If you want more personalized guidance, consider working with a human financial advisor or a robo-advisor. They can help you establish goals, assess risk tolerance, and choose the right brokerage accounts and investments for your needs.

Frequently asked questions