Mutual Fund Strategies For A Bull Market

Mutual funds are a popular investment choice as they offer professional management, diversification, affordability and liquidity. They are a good option for those who don't want to pick and choose individual investments but still want to benefit from the stock market's high average annual returns.

If you're looking to invest in mutual funds, there are a few steps you should follow. Firstly, decide on your investment goals and risk tolerance. Are you investing for the short-term or long-term? Do you have a high or low risk tolerance? This will help you determine the right mix of stocks and bonds for your portfolio.

Next, decide whether you want to invest in active or passive funds. Active funds are managed by professionals who aim to beat the market, while passive funds take a more hands-off approach and aim to mimic the market. Passive funds tend to be cheaper and often outperform active funds despite their efforts to beat the market.

Once you've decided on your investment strategy, it's time to research mutual fund companies and specific funds that align with your goals and risk tolerance. Consider factors such as fees, past performance, and the fund provider's reputation.

After you've chosen your funds, you'll need to open an investment account and purchase shares of the mutual funds. Keep in mind that mutual funds usually have higher investment minimums than other asset classes, so make sure you have enough funds deposited in your account.

Finally, set up a plan to keep investing regularly and remember to rebalance your portfolio annually to ensure it remains aligned with your risk tolerance and investment goals.

Understand the different types of mutual funds

Mutual funds are typically categorized as bond funds, equity funds, target-date funds, and money market funds. Each of these funds has different investment profiles, risk levels, performance results, and fees. Depending on your personal investment profile, some will be a better fit for you than others. Here is a more detailed look at each type:

• Bond Funds: Also referred to as fixed-income funds, this type of mutual fund owns Treasurys, municipal bonds, or corporate bonds. Bond fund investors tend to want income preservation and yield.
• Equity Funds: Also called stock funds, this type of mutual fund owns shares of stock in public companies. Equity fund investors generally want more appreciation than income payments, although there are specialized dividend funds that aim to generate yield.
• Target-Date Funds: These funds are designed for retirement investors and generally have a “target date” year when holders are expected to retire. They hold a mix of stocks, bonds, and other securities. Over time, the portfolio shifts its allocation from riskier investments to safer investments.
• Money Market Funds: These mutual funds tend to offer very low yields and very low risk compared with bond and equity funds. Instead of appreciation or yield, money market fund investors are looking to preserve the value of their cash above all else.

Additionally, mutual funds can be classified as either actively or passively managed. Actively managed funds have portfolio managers who make decisions about which securities and assets to include in the fund, while passively managed funds, often called index funds, seek to track and duplicate the performance of a benchmark index. Actively managed funds are usually more expensive, while passively managed funds tend to have lower fees.

Set an investment goal

Setting an investment goal is the first step to investing in mutual funds. This involves identifying what you are investing for. Are you saving for a secure retirement? Or perhaps you are planning to buy a home or pay for a child's education? The time frame of your investment goal is also important. Is this a short-term or long-term goal?

If you are investing for the short term, it is recommended that you skip stock and bond mutual funds. This is because stocks and bonds can be volatile. Instead, opt for a short-term vehicle like a savings account or money-market fund. An exception to this is if you are investing for current income, in which case an income fund is a better option.

If you are investing for the long term, mutual funds are a good choice. With a longer time frame, your portfolio will be able to weather the stock market's periodic losses. Over the long term, the S&P 500, an index of the market's 500 largest stocks, offers an average annual return of about 8%.

Once you have identified your investment goal, you can decide on the right mix of stocks and bonds. If you are in your 20s, a very stock-heavy allocation is recommended. If you are nearing retirement, you will still want substantial stock exposure, but you will also want to have a lot more bonds.

When setting an investment goal, it is also important to consider your risk tolerance. Can you accept dramatic swings in portfolio value, or do you require a more conservative investment? This will help you determine whether you want to invest in actively or passively managed mutual funds. Actively managed funds aim to beat the market and usually carry higher fees, while passively managed funds aim to match the market and have lower fees.

Finally, when setting your investment goal, it is crucial to understand the fees associated with mutual funds, as these will impact your overall returns. Mutual funds may charge sales fees, known as "loads", when you buy or sell shares. They may also charge redemption fees if you sell shares within a short period after purchasing them. Additionally, there are annual fees, known as expense ratios, which cover the fund's operating expenses.

Decide on an account type

There are several types of investment accounts, each with its own purpose. Choosing the right type of account depends on your savings goals, investing style, and account ownership wishes. Here are some of the most common types of investment accounts:

• Standard brokerage account: This is a taxable brokerage account or a non-retirement account that provides access to a broad range of investments, including stocks, mutual funds, bonds, and exchange-traded funds. Any interest, dividends, or capital gains on investments are subject to taxes in the year they are received. Standard brokerage accounts can be opened as individual or joint taxable brokerage accounts. When opening this type of account, you will also need to choose between a cash account, which is suitable for most investors, and a margin account, which allows for riskier margin trading.
• Retirement account: A retirement account, such as an IRA, is similar to a standard brokerage account but with tax advantages. The two most common types of retirement accounts are traditional IRAs and Roth IRAs, which offer different tax benefits. Other types of retirement accounts include SEP IRAs, SIMPLE IRAs, and Solo 401(k)s.
• Investment accounts for kids: These include custodial brokerage accounts, which are set up for minors with money gifted to them, and Roth or traditional IRAs for children with earned income. Custodial accounts can be in the form of Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, which differ in the types of assets they can hold.
• Education accounts: These include 529 savings plans and Coverdell Education Savings Accounts (ESAs), which can be used to save for college or other qualified education expenses. 529 plans can also be used for elementary and secondary education expenses, and the money can be transferred to other family members if the original beneficiary does not use all the funds.
• Health Savings Accounts (HSAs): These accounts are designed to save for medical expenses and are available to those enrolled in a high-deductible health plan. Contributions to HSAs are made on a pre-tax basis or may be tax-deductible, and withdrawals for qualified expenses are tax-free.

Research mutual fund companies

Researching mutual fund companies is an important step in deciding where to invest your money. Here are some detailed and direct instructions on how to research mutual fund companies:

• Familiarise yourself with the different types of mutual funds on offer. There are four main categories: stock, money market, bond, and target-date funds. Within these categories, there are also subcategories to consider, such as the size of the companies the fund invests in (small-, mid-, or large-cap) or the investment approach (aggressive growth, income-oriented, or value).
• Compare fees and expenses. Mutual funds charge annual fees, expense ratios, or commissions, which will reduce your overall returns. Look for funds with lower expense ratios, as these will cost you less. Be sure to also consider any sales charges or "loads" that may be incurred when buying or selling shares, as well as redemption fees and other account fees.
• Evaluate the fund's performance. Research the fund's historical performance record and compare it to similar funds or market indexes. Look at the fund's performance over a long period and in different market environments to get a true sense of its success.
• Consider the fund's investment strategy. Decide if you want an actively managed fund, where a fund manager actively picks stocks and bonds, or a passively managed fund, which aims to deliver returns that match a market benchmark. Actively managed funds tend to have higher fees, and passively managed funds often outperform them despite their lower costs.
• Check the fund company's regulatory history. Look for any regulatory issues or complaints by checking the company's SEC filings, which should be available on their website. This will help you assess the company's reputation and trustworthiness.
• Review the fund's prospectus. The prospectus will provide detailed information about the fund's investment objectives, strategies, risks, performance, and fees. It is a crucial document to help you understand the fund's specifics and make an informed decision.
• Assess the fund's management. Research the fund manager's qualifications, experience, and track record. Evaluate their investment style and whether it aligns with your goals and risk tolerance. Consider the manager's performance in different market conditions to gauge their ability to navigate market fluctuations.

Understand mutual fund fees

Understanding mutual fund fees is crucial when investing in mutual funds, as these costs will significantly affect your investment returns over time. Here is a detailed overview of the different types of mutual fund fees:

Two Broad Types of Mutual Fund Fees:

Mutual fund fees can be broadly categorized into two types:

• Annual Fund Operating Expenses: These are ongoing fees associated with the cost of managing the fund, including paying managers, accountants, legal fees, marketing, and other operational costs. These fees are typically expressed as a percentage of your investment in the fund and can range from 0.25% to 1% or more per year.
• Shareholder Fees: These are one-time costs incurred when you buy or sell mutual fund shares, also known as load fees. They include sales commissions, redemption fees (charged when selling shares shortly after purchase), exchange fees (for transferring shares to another fund), and account fees (for maintaining your account).

Understanding the Details:

When evaluating a mutual fund's fees, it's important to review the fund's prospectus, a legal document that provides detailed information. Here are some key fee-related terms to look for:

• Management Fees: The cost of paying fund managers and investment advisors, included in the annual fund operating expenses.
• 12b-1 Fees: Fees capped at 1% that cover the cost of marketing, selling the fund, and providing shareholder services.
• Other Expenses: These may include custodial, legal, accounting, transfer agent, and other administrative costs.
• Sales Loads: Commissions paid when buying or selling mutual fund shares, either as a front-end load (paid upfront) or a back-end load (paid when selling shares).
• Redemption Fee: Charged when selling shares shortly after purchase to discourage short-term trading.
• Exchange Fee: Charged when transferring shares to another fund within the same fund group.
• Account Fee: A maintenance fee, often charged if your account balance falls below a specified minimum.
• Purchase Fee: A fee paid directly to the fund at the time of purchase, distinct from a front-end sales load.

No-Load Funds:

Some mutual funds are marketed as "no-load funds," meaning they do not charge sales loads. However, it's important to note that no-load funds may still charge other types of fees, such as redemption, exchange, account, and purchase fees.

Impact of Fees on Returns:

Mutual fund fees can significantly impact your investment returns over time. Even small differences in fees can result in substantial differences in your overall returns. It's essential to consider the fees carefully and understand how they can compound over time, potentially reducing your investment earnings.

Frequently asked questions