How can you invest in a mutual fund?
Do you want more return than on your savings account, but is investing yourself is not an option? Choose for investing in a mutual fund! With an investment fund, you can have your money invested automatically, which means you can still achieve a nice return without having to invest time. But how does investing in an investment fund work, and where can you do this?
How does investing in a mutual fund work?
Investing in an investment fund is relatively easy. Most time is obviously spent in making a selection: which investment fund is the best? As soon as you have decided this, you only have to deposit the minimum amount, and you can start investing immediately.
With an investment fund, you receive so-called units. The fund invests all the assets of the clients and divides the return over the participants in proportion to the amount invested. So, you receive the part of the return to which you are entitled and this amount is directly reinvested in most funds.
So, once you have found a fund, it is not difficult to start investing immediately!
Where can you invest in a mutual fund?
You can invest in a mutual fund at an online broker. A broker is a company that can buy financial securities on your behalf. Opening an account at a broker is free. You do pay money for the execution of transactions: it is therefore important to compare the different brokers with each other.
A good broker for trading investment funds is DEGIRO. At DEGIRO, you can invest in an investment fund without paying any purchase and selling costs. Do you want to try out this broker? Then open an account at DEGIRO immediately:
What are the advantages of investing in a mutual fund?
Many investors choose an investment fund because of its convenience: you do not have to look after it much as the fund manager takes all the difficult decisions. Because it is possible to start with small amounts, even as a novice investor you can immediately get started with a fund.
Another major advantage of investing in a fund is that you automatically spread the risk. After all, a fund invests in a broader selection of shares, which means that with one investment you immediately invest in a series of investment products.
However, it is advisable to carefully examine what the fund invests in. Not every fund is as diversified as you might think and only invest in a handful of shares.
How much does investing in a mutual fund cost?
The costs between investment funds can differ greatly: with some funds, you pay high management costs. Especially with some active funds, the costs can be high. This is because active funds often have to hire many analysts. Some funds also charge performance costs: when the fund performs well, you pay part of the return back to the fund.
It is wise to be careful with active funds: active funds rarely succeed in beating the market in the long term. Since the costs of an active fund are high, an index fund can be more attractive in many cases.
An index fund is a passive fund that automatically invests in a basket of shares. Because the investment decisions are taken automatically, there is no need to pay expensive analysts. This means that when you invest in an index fund, you only pay the buying and selling costs.
What returns do you get with investment funds?
The return on an investment fund can fluctuate greatly. The price of an investment fund rises or falls depending on the value of the underlying securities. In addition, many funds also pay out dividends. When a fund does not pay dividends, the dividends are usually reinvested.
The average return of a fund can fluctuate a lot: over a long period of time, count on a return of between 6 and 8 percent on an annual basis. Of course, there are always specific regions that do much better or worse. It can therefore be smart to spread your risks over different investment funds.
What are the risks of investing in a mutual fund?
Investing in a mutual fund is not without risk. The risks of investing in an investment fund are certainly lower than the risks of investing in individual shares. Nevertheless, even with an investment in an investment fund, you can certainly lose money.
You can lose money through price risk: the price of the fund will fall and your investment will be worth less. There is also a debtor risk: if one of the companies in the fund goes bankrupt, you can lose a large part of your investment. If the interest in the stocks in which the fund trades falls, it is difficult to sell your shareholding: this is also known as the liquidity risk.
When you invest in funds that invest in foreign stocks, you also face currency risk. When your currency depreciates, you can lose money as you get less money back when you sell the investment. Interest rate increases can also reduce your return and finally, there are also geographical / sector-specific risks.
Therefore, remember that investing is never without risk: only invest in investment products you understand with money you do not need.
What types of funds are there?
There are different types of investment funds: with an equity fund, for instance, you only invest in shares and with a bond fund only in bonds. If you want to spread your risks as much as possible over different investment products, you can choose a mixed fund. With a mixed fund, you invest in a combination of investment products. If you want to take more risks, you can also choose a hedge fund: a hedge fund tries to beat the market by using derivatives.
Best strategy for investing in a fund
When you want to invest in a mutual fund, you don’t have to make many decisions. However, this does not mean that you can sit back and relax: you still have to decide how to invest in the fund. You can choose to invest a considerable amount in the fund immediately. However, for most people this is not the best way to invest in a fund.
It is often smarter to spread your investments. This way of investing is also called dollar cost averaging. If, for instance, you deposit $1000 every month, you will step in at both the most attractive and the least attractive moments. In this way, you will achieve the average result of the fund.
Choosing a fund
Yet, investing in an investment fund is not necessarily easy: you must first decide which fund to select. The choice you make has an enormous influence on the final result: it is therefore important that you choose a mutual fund that suits your investment objective.
When selecting an investment fund, risk and return play a crucial role. Of course, the return is crucial: in the end, we all want to make money, we do not put our money in an investment fund and then lose money.
Yet, it is important not to lose sight of the risk. As soon as you start investing in a mutual fund, you must pay attention to, among other things, the drawdown or the maximum amount that the fund has been in a loss. It is also wise to look at how the fund dealt with the credit crisis in 2008.
Is an investment fund an attractive investment?
Whether investing in an investment fund is attractive depends entirely on your personal situation. If you select good funds, you will achieve a much higher return with an investment fund than with a savings account. So, it is definitely not a stupid move to put part of your savings in an investment fund.
A disadvantage of the investment fund is the often high transaction costs. The fund must be managed and a part of the profit goes to the manager. The return is therefore lower than when you would have carried out the activities of the fund yourself. When you are interested in investing, and you want to try this out for yourself, then this can be an even more attractive option.
When you want to start investing yourself, it is wise to first try it out by means of a demo. With a demo, you can test the possibilities without any risk. Click here to see where you can try investing for free >>.
Conclusion: is it smart to invest in a mutual fund?
Investing in an investment fund is advisable for almost everyone. Especially with index funds, you can achieve a nice, average and stable return. By periodically investing, you take away the stress of timing the market, so that even without knowledge you can profit from the developments in the stock market. Moreover, due to the power of interest on interest, your capital will grow exponentially in the long run: early entry is therefore recommended.