How to invest in an investment fund?

With an investment fund, you can automatically invest your money. But how does investing in an investment fund work, and where can you do this?

How does investing in an investment fund work?

Investing in an investment fund is straight forward. You will probably spend most time on selecting the best fund. Once you have decided this, you only need to deposit the minimum amount, and you can get started immediately.

With an investment fund, you receive so-called participations. The fund invests all the balances of the customers and distributes the return among the participants in proportion. You receive the part of the return that you are entitled to, and this amount is reinvested directly in most funds.

Once you selected a fund, it is not difficult to start investing right away!

Where can you invest in an investment fund?

You can invest in an investment fund through an online broker. A broker is a company that can buy financial securities on your behalf. Opening an account with a broker is usually free. However, you do pay money for executing transactions, which makes it important to compare the different brokers:

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What are the benefits of investing in an investment fund?

Many investors choose an investment fund because of the convenience. Since it is possible to start with small amounts of money, even novice investors can get started with an investment fund.

Another great advantage of investing in a fund is that you automatically diversify your risks. After all, a fund invests in a wider selection of stocks, which means that you can diversify with a single investment.

It is advisable to investigate what the fund invests in. Not every fund is as diversified as you might think: some funds, for example, track an index where a handful of stocks hold the highest weight.
investing in an investment fund

How much does investing in a mutual fund cost?

The costs between mutual funds can vary greatly: with some funds, you pay high management fees. Especially with some active funds, costs can be high. This is because active funds often have to hire many analysts. Some funds also charge performance fees: when the fund performs well, you have to pay part of the return as a fee to the fund.

It is wise to be careful with active funds: active funds rarely manage to beat the market in the long term. Since the costs of an active fund are high, it can typically be more attractive to invest in an index fund.

An index fund is a passive fund that automatically invests in a basket of stocks. Because investment decisions are made automatically, expensive analysts do not have to be paid. This means that with investments in an index fund, you actually only pay the purchase and sale costs.

What return do mutual funds yield?

The return on a mutual fund can fluctuate greatly. The price of a mutual fund rises or falls depending on the value of the underlying securities. In addition, many funds also pay dividends. When a fund does not pay dividends, the dividend is usually reinvested.

The average return of a fund can vary greatly: expect a return between 6 and 8 percent per year over a long period of time. Of course, there are always specific regions that perform much better or worse. It can therefore be wise to spread your risks over different mutual funds.

What are the risks of investing in a mutual fund?

Investing in a mutual fund is not without risk. The risks of investments in a mutual fund are certainly lower than the risks of investing in individual stocks. However, you can still certainly lose money with an investment in a mutual fund.

For example, you can lose money due to price risk: the value of the underlying assets of the fund then decrease in value. There is also the debtor risk: when one of the companies in the fund goes bankrupt, you can lose a large part of your investment. If interest in the stocks in which the fund trades declines, then it can be difficult to sell your participation: this is called liquidity risk.

When you invest in funds that invest in foreign stocks, you also face currency risk. When your own currency declines in value, you can lose money, since you get less money back when you sell the investment. Interest rate increases can also reduce your return and finally, there are also geographic/sector-specific risks.

Remember that investing is never without risks: only invest in investment products that you understand with money that you do not need.

What types of funds are there?

There are different types of mutual funds: for example, with a stock fund, you only invest in stocks 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 opt for 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 an investment fund, you don’t have to make many decisions. However, this does not mean that you can sit back and relax completely: you still have to decide how to enter the fund. You can decide to invest a large amount directly into the fund, but for most people, this is not the best way to invest in a fund.

It is often smarter to invest gradually. This method of investing is also called dollar cost averaging. For example, if you deposit $1000 every month, you invest at both the most attractive and least attractive moments, which makes it possible to achieve an average return.

Choosing a fund

Investing in an investment fund is not necessarily easy: you first have to decide which fund to select. The choice you make has a huge impact on the eventual result: it is important that you pick an investment fund that fits your investment goal.

When selecting an investment fund, risk and return play a crucial role. Return is of course very critical: ultimately, we all want to make money, we don’t invest our money in an investment fund just to lose it.

However, it is essential not to lose sight of the risk. Once you start investing in an investment fund, you need to pay attention to the drawdown, or the maximum amount that the fund has lost. It is also wise to examine how the fund performed during the credit crisis in 2008.

Is investing in an investment fund attractive?

Whether investing in an investment fund is attractive depends entirely on your personal situation. If you select solid, high-quality funds, you can achieve a much higher return with an investment fund than with a savings account. Therefore, it is definitely not a foolish move to invest some of your savings in an investment fund.

A disadvantage of the investment fund are the often high transaction costs. The fund needs to be managed, and a portion of the profit goes to the manager. The return is therefore lower than if you had executed the trades of the fund yourself.

If you want to start investing yourself, it is wise to try it first with a demo. With a demo, you can test what the possibilities are without risk. Click here to see where you can try investing for free >>

Conclusion: is it wise to invest in an investment fund?

Investing in an investment fund is recommended for almost every investor. Especially with index funds, you can achieve a stable return. By periodically investing, you take away the stress of timing the market, allowing you to profit from developments in the stock market even without knowledge. Due to the power of compound interest, your assets also grow exponentially over time: it can therefore be wise to start early.

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Over Alex Mostert

When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about! Don’t hesitate to leave a comment under this article.

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