The New Year means new personal resolutions. If your New Year’s resolution for 2013 is to start saving more money and start learning about investments then Green Panda is here to help. Some people need to learn how to save money and some people need to learn how to invest their money. People who want to save more money usually need to learn to live on a budget so that they can free up some extra money each month. People who already save money but do not invest usually need to learn about their different investment options and learn about the associated risks when investing your money.
As a financial advisor the number one objection that I hear from clients who want to invest but have not yet started purchasing mutual funds is that they don’t want to invest in the market because they don’t want to lose their money. The number one reason why people don’t do something in life is that they are scared, but if you educate yourself investing doesn’t have to be scary. Not all mutual funds are high risk investments; with a little bit of research and a little bit of guidance from a financial advisor you can learn about your different options when investing in mutual funds.
4 steps to invest in the right mutual fund for you:
1. Understand how a mutual fund works. A mutual fund is a pooled investment; this means that you are not directly buying any securities (such as bonds or stocks) on the market. All investors put their money into a mutual fund and the fund manager invests it “en mass” according to the mutual funds objectives and goals. Before you purchase a mutual fund you should read the fund’s objectives to determine if the investment goals and strategies are the same as your own personal strategies.
2. Find a level of risk that you are comfortable with. Mutual funds can range from very low risk funds such as money market mutual funds to very high risk funds such as mutual funds that invest in one sector (i.e. technology) or one region (i.e. China). As an investor you have to purchase a mutual fund that has a level of risk that you are comfortable with, the level of risk can be found in the mutual fund profile. If you are a first time investor I suggest that you invest in income or balanced funds until you find your personal investment style and your comfort level of risk.
3. Learn about the fees associated with certain mutual funds. Mutual funds all charge a management expense ratio (MER) which is a percentage fee charged by the fund manager. The rates of return are usually published after the MER has already been withdrawn by the fund manager for their services. MERs depend on the level of the fund manager’s involvement as well as their location; a fund manager who lives in China to manage an Asian Equity Fund takes his living expenses into consideration when choosing the MER. Since this fee is standard for all investors in a particular mutual fund you will see it on the fund profile but you will usually not see it on your statement. On top of a MER your bank for investment broker may charge additional transaction fees when investing in a mutual fund.
4. Invest slowly and on a regular basis. Another huge mistake that I see as a financial advisor is rookie investors who put all of their money into the market before they are comfortable with the level of risk of a mutual fund. Invest regularly into your mutual fund and wait until you receive a few statements before you go all in. This makes sure that you understand the fluctuations associated with your investments.
Photo by Azureon2