Are Mutual Funds Good for Beginners?

Investing is a scary venture, particularly when you first begin. There are so many options and potential pitfalls that many people choose not to invest at all, but the best advice is to educate yourself. Generally, I find that novice investors are ready to invest when they begin to question if a seemingly complicated investment vehicle like mutual funds is good for beginners. 

Mutual funds are good for beginners because they create a diversified portfolio, are more accessible today than ever before, and have fewer associated costs, which means your investment grows more quickly. They are also generally safer than stocks.

The rest of this article will focus on the basics of mutual funds, including why they are a good investment for beginners, how to purchase mutual funds, and resources to help you continue educating yourself about mutual funds.

Why Mutual Funds Are Good For Beginners?

Before the days of fractional shares and social media investing apps like Robinhood and Public that brought investing into everyday conversation, the process seemed too difficult for the average person, and mutual funds seemed especially complicated. 

Learning about the funds was complicated; realizing the fees associated with mutual funds was daunting. Plus, the idea of paying load fees and commissions turned many individual investors away. Mutual funds enjoyed much of the 401K and college savings portfolios, but individuals often shied away from them due to confusion over how they work.

In fact, mutual funds did not become a significant player in the average investor’s financial portfolio until around 1970. 

Since that time, books, blogs, and videos have become available so that investors can get the education they need to make wise decisions. 

Mutual funds as a whole are not that complicated. They are a collection of investments held by a pool of investors, making it possible for these investors to own parts of many diverse companies. 

Here are a few reasons why mutual funds can be good for beginners:

You Invest Sooner 

Rather than saving to purchase an entire share in every company that interests you, brokers and financial managers use money from their investors to buy the shares held in mutual funds made up of these different companies. This action automatically creates diversification and more safety.

Fewer Risks 

It is unlikely that the fund will ever lose all of your investment. There is more safety in diversification because it is doubtful that all of the companies in the fund will lose money or go bankrupt at the same time. 

It is also common for some companies to do better than others on any given day, and the gains offset the losses. This ability to absorb losses is why many employer-sponsored retirement funds invest exclusively in mutual funds.

Lower Costs 

Another reason mutual funds are good for beginners is that, in many cases, they are cheaper than stocks. Today, there are many mutual funds available with low and sometimes no minimum account requirements. 

What’s more, no-load funds are more available today than they were twenty years ago. This availability does not mean that no-load funds are best; it means that there is an option to purchase no-load funds, which makes many beginners feel more secure.

It is important to remember that all mutual funds carry some fee. The difference is how and why the fees are paid, so make sure you educate yourself on the mutual fund you plan to buy.

Aside from the low costs and minimal initial investment requirement, mutual funds are good for beginners because they offer tax breaks, and most importantly, they are managed by a professional. 

So, while you should educate yourself on both the process and the fund, knowing that a professional is managing your investment offers a measure of safety that other investment vehicles do not provide the beginner.

How Do I Invest in Mutual Funds?

The first step in purchasing mutual funds is to determine your financial goal. Are you saving for a large purchase? Income? College Savings? Retirement? Your purpose will help determine the mutual fund that will best serve your needs.

Once you know your financial purpose, begin to research asset management companies (AMC). You can find them both in brick and mortar buildings and online. 

The following are AMCs that offer no minimum and zero trade commissions.

1. TD Ameritrade offers a lot of research and many education programs, making it an excellent choice for beginners.
2. Fidelity is one of the most extensive financial services, and since 1946, it has been known for its mutual funds investing.
3. Vanguard is most attractive to long-term investors. They have a large fund selection and low costs.

Risk Tolerance 

After determining your financial objective, the next step in choosing a mutual fund is determining your risk tolerance level. Some investors easily accept market highs and lows, while others stay awake at night with any dip. 

There is a risk versus reward relationship to all mutual funds, and knowing your risk tolerance will help you choose the right mutual fund so that you can invest long-term.

Once you know your risk tolerance, select three mutual funds to research and choose the one that best suits your investment style. 

Mutual Fund Educational Resources

To know your investing style and risk tolerance, you will need to read books, watch videos, and listen to other investors and professionals.

Putting time into this process will pay dividends later because an educated investor is a powerful investor. The most accessible place to begin is with books, so I’ve gathered some of my favorite books available on Amazon for you below.

• Mutual Funds: Comprehensive Beginners Guide is for beginners who want to learn about mutual fund cycles, how to select a money manager and strategies for building your portfolio. 
• Bogle on Mutual Funds is a more comprehensive book written by the former Vanguard Chief Executive, John Bogle. Although he has been a critic of mutual funds, he uses his experience to educate readers on what they should do and pitfalls to avoid. 
• Mutual Funds for Dummies is the typical “Dummies” approach to learning about mutual funds. Eric Tyson discusses successful strategies, matching funds with your financial goals, and evaluating your fund’s performance.
• Mutual Funds for Beginners: How to Invest in Mutual Funds for Safe Investing and Great Profits provides a detailed explanation of mutual funds in general and uses everyday language so that the advice is accessible to all. 
• Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition is another book written by John C. Bogle. This book focuses on fundamentals that you can apply to any market, and he discusses regulatory changes.
• Mutual Funds: Tips and Tricks to Learn the Realms of Mutual Funds and Upscale Your Income focuses on educating readers to have more informed conversations with their fund managers. It is the book to read before deciding on a broker.
• Morningstar Guide to Mutual Funds: Five-Star Strategies for Success is exactly what it says in the title: a guide. It’s easy to use as a reference book, and John Bogle calls it “priceless.” With his stamp of approval, we call it “a must-read” for beginners.
• The Mutual Funds Book: How to Invest in Mutual Funds and Earn High Rates of Returns Safely discusses the ups and downs of investing in mutual funds. Northcutt focuses on evaluating your risks by examining the various types and advantages of each mutual fund.

Conclusion

Investing money is easy for some, yet incredibly hard for others because it is risky. This is your hard-earned money, after all, but mutual funds are a good choice for beginners who want to make more money on their investments than savings accounts and CDs will provide. Education is the key to success; after that, you simply get started.