Learn the basics for the beginning investor to put money to work in mutual funds.
Mutual funds are an easy way for beginning investors to put their money to work in the markets. But before you invest in mutual funds, it’s important to know what to watch out for. With index funds that are passively managed and tend to have low expense ratios and actively managed funds that promise the potential to outperform but typically at a higher cost, you need to know what you’re buying before you invest. Following these steps can give you a better sense of how to be smart with mutual fund investing.
Step 1: Decide whether you want to go active or passive
The biggest decision you’ll need to make as a mutual fund investor is whether you think active management is worth the extra price you’ll pay. Unfortunately, a large majority of actively managed mutual funds end up underperforming the major stock market benchmarks, making it counterproductive to spend more money to invest in them. However, a handful of fund managers have been able to demonstrate sustained outperformance over the long run. If you’re confident that those track records are legitimate — and that they’ll continue — then it can make sense to invest at least some of your money actively in order to try to capture the prowess of superior fund managers.