A Beginner's Guide To Scottrade Mutual Funds

Investing in mutual funds is a great way to build a diversified portfolio without a lot of extra cost or hassle. They are an excellent option for those who don't have the time, education, money, or willingness to manage a large portfolio of investments.

1. Define your investment goals: Are you investing for the short term or the long term? This will help you determine the type of mutual fund that is suitable for you.

2. Pick a mutual fund strategy: Decide on the investment strategy that aligns with your goals. For example, if you are investing for the long term, you may want to allocate a larger portion of your portfolio to stock-based mutual funds.

3. Research potential mutual funds: Use tools like the Mutual Fund Observer and Maxfunds to research and compare different mutual funds based on factors such as past performance, expense ratios, load fees, and management style.

4. Open an investment account: You can invest in mutual funds through an employer-sponsored retirement plan, such as a 401(k) or 403(b). Alternatively, you can open a brokerage account on your own and invest through individual retirement accounts (IRAs), taxable brokerage accounts, or education savings accounts.

5. Purchase shares of mutual funds: Make sure you have enough money deposited in your investment account. Keep in mind that mutual funds may have higher investment minimums than other asset classes.

6. Set up a regular investment plan: Consider setting up recurring investments to grow your wealth over time and take advantage of dollar-cost averaging.

7. Monitor your investments: Check in on your investments periodically to ensure they are performing as expected and make adjustments as needed.

8. Plan your exit strategy: Keep in mind any fees or taxes that may apply when you eventually sell your mutual fund shares to pay for your financial goals.

Decide on your investment goals

Before investing in mutual funds, it is important to first identify your financial goals and the purpose of your investment. Ask yourself: Are you saving for a secure retirement in several decades, or are you planning to buy a home or pay for a child's education in the short to medium term?

If you are investing for the short term, it is generally recommended to skip stock and bond mutual funds. This is because stocks and bonds can be volatile, and you may not have enough time to ride out the market's inevitable peaks and valleys to arrive at a gain. 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 you may want to consider an income fund, which tends to be comprised of income-producing assets like dividend stocks, bonds and real estate.

On the other hand, if you are investing for the long term, mutual funds can be a great option. With a longer time frame, your portfolio will be able to weather the stock market's periodic losses, and you are likely to see returns on your investment.

When investing in mutual funds, it is also important to consider your risk tolerance and investment style. Are you comfortable with a more hands-on approach, actively picking out stocks and funds that will outperform the market, or would you prefer a more passive approach, with returns that match the market? Active funds tend to charge higher fees, while passive funds are cheaper and often outperform active funds despite their lower fees.

Finally, when deciding on which mutual funds to invest in, be sure to research the fund companies and the funds themselves. Look at the fund's fees, historical performance, and the types of stocks and bonds it invests in.

Pick the right mutual fund strategy

Picking the right mutual fund strategy is a crucial step in investing in mutual funds. Here are some detailed guidelines on how to choose the right mutual fund strategy:

Long-term goals:

If your investment goals are long-term, such as retirement planning or saving for your child's education, you should consider stock-based mutual funds. These funds offer the potential for higher investment growth over time. Within this category, you can explore "growth funds," which focus on companies expected to outperform their peers. Examples include the Vanguard Growth Index Fund (VIGAX) and Fidelity Growth Discovery Fund (FDSVX).

Mid-term goals:

If you're uncomfortable with the volatility of the stock market or have goals within the next five to ten years, consider balanced mutual funds. These funds invest in both stocks and bonds, reducing the risk associated with stocks. Suggested balanced mutual funds include the Vanguard Wellesley Income Fund (VWINX) and the American Funds American Balanced Fund (ABALX).

Near-term goals:

For goals just a few years away, minimizing risk becomes a priority. A strategy for this timeframe could be to allocate 30% of your investments to stock mutual funds and the remainder to bond funds. Income-oriented mutual funds, such as the PIMCO Total Return (PTTAX) and the Vanguard Equity Income Fund (VEIPX), can provide a steady income stream through interest payments.

Target-date funds:

If you prefer a more hands-off approach, target-date funds offer a hassle-free solution. These funds automatically adjust their asset allocation based on a specific target date in the future, gradually shifting to lower-risk assets as that date approaches.

When picking the right mutual fund strategy, it's essential to consider your risk tolerance, investment horizon, and financial goals. Diversification and professional management are key advantages of mutual funds, but it's important to monitor fees and expenses to maximize your returns.

Research potential mutual funds

When researching potential mutual funds to invest in, you can use tools like the Mutual Fund Observer and Maxfunds. These sites provide detailed information on different mutual funds in multiple categories. Most brokerages' websites also include mutual fund research tools and screeners for clients. Here are some factors to consider when researching potential mutual funds:

Past Performance

While a fund's past performance is no guarantee of its future success, it can be a good indication of how well the fund is meeting its stated goals. Compare past performance to similar mutual funds or benchmark indices.

Expense Ratios

These are annual fees that compensate the fund's managers and cover the cost of buying the fund's investments. The industry average expense ratio is 0.57%, but you can find many funds that charge much less. While most expense ratios are less than 1% or 2%, they can drastically impact your money's growth over time.

Load Fees

Load fees are sales commissions charged by the broker who sells you a mutual fund. Mutual funds are often classified as "load" or "no-load" funds. Load funds charge commissions while no-load funds do not. Given the wide range of funds available, you should be able to find comparable investments without fees.

Management

Actively managed mutual funds aim to beat the performance of an underlying index and usually charge higher fees. On the other hand, passively managed mutual funds, or index funds, aim to duplicate the performance of an underlying index and typically charge lower fees. Historically, passively managed index funds have outperformed actively managed funds over the long term.

Open an investment account

Opening an investment account is a crucial step in investing in mutual funds. Here is a detailed, instructive, and focused guide on how to do it:

Open an Investment Account

If you already participate in an employer-sponsored retirement plan, such as a 401(k) or 403(b), you have access to mutual funds. Most retirement plans direct your contributions to mutual funds rather than individual stocks or bonds. Additionally, you can often elect to invest in target-date funds, which automatically adjust their asset allocation over time. This option is suitable for those who want a more hands-off approach to managing their investments.

If you don't have access to an employer-sponsored retirement account or are investing for goals outside of retirement, you have other options for opening an investment account:

• Individual Retirement Accounts (IRAs): You can open an IRA with a brokerage firm and invest in mutual funds for your retirement while taking advantage of tax benefits.
• Taxable Brokerage Accounts: These accounts lack the tax advantages of retirement accounts but offer more flexibility, as you can make withdrawals at any time without penalties. They are well-suited for goals you want to achieve before reaching the standard retirement age.
• Education Savings Accounts: If you have children and want to save for their college education, you can open a 529 college savings account and invest in mutual funds specifically for this purpose.

When choosing a brokerage firm to open your investment account, consider factors such as the range of mutual funds available, investment research tools, fees, and customer support. It's also essential to understand the different types of mutual funds offered, such as actively managed funds and passively managed index funds, and their associated fees and potential benefits.

Purchase shares of mutual funds

Once you have decided on your investment goals, the type of mutual fund, and the brokerage account you want to use, it is time to purchase shares of mutual funds. Here are the steps to follow:

• Decide on your budget: Determine how much money you are comfortable investing in mutual funds. Keep in mind the minimum investment amounts required by different funds, which can range from $100 to $3,000 or more.
• Choose the right mix of funds: Consider your risk tolerance, investment goals, and time horizon when selecting a mix of mutual funds. Diversify your portfolio by investing in multiple funds to reduce the impact of underperforming funds.
• Understand the fees: Mutual funds have different fee structures, including expense ratios, sales loads, and account fees. Evaluate these fees as they can impact your overall returns over time.
• Select a brokerage platform: Choose a brokerage platform that offers a wide range of mutual funds, provides research and educational tools, and has low transaction fees. Some popular options include Fidelity and TD Ameritrade.
• Place your order: Log in to your chosen brokerage platform and place an order to purchase shares of your selected mutual funds. Keep in mind that mutual funds are traded only once per day after the market closes, so your order will be executed at the closing price of the day.
• Set up automatic investments: Consider setting up automatic recurring investments to grow your portfolio over time. This can be easily done through your brokerage platform, and it helps take the emotion out of investing.
• Monitor and rebalance your portfolio: Regularly check on the performance of your mutual funds and make adjustments as needed. Rebalancing involves adjusting the weightings of different funds in your portfolio to maintain your desired level of risk and alignment with your investment goals.

Frequently asked questions