Mutual funds are considered to be the easiest investment instruments to diversify your investments. With one mutual fund, you invest in twenty, fifty and even to many hundreds of different companies and it is even possible you invest in a mix of shares, bonds and some other investment assets. There is no guarantee to make a profit because you can never exclude the risk factor, nobody can predict market trends, and maybe you have bought when stocks are valued at peak prices.
Here are some tips which may help make a profit with mutual funds.
* Determine your risk profile
Before you start investing in mutual funds, you need to determine your risk profile. Mutual funds might seem the best solution to reach a higher return than your savings account but you can go wrong if you take more risk than you can afford. Your age, income and time horizon are important factors to know if investing in mutual funds is a good idea for you. It is important to know if you can miss your money for several years because you never know if the value of your mutual funds will increase rapidly or not.
Mutual funds which invest in stocks will likely reach higher returns than these which invest in bonds but the risk is also much higher. They can also drop until a level you will never gain your money. Investing in equity funds is more recommended for young investors than these which near the age of retirement.
* Your time horizon
It is a common mistake of many investors to not respect the time horizon of the mutual funds you’ve bought. You may never invest in mutual funds if you need your money faster than the time horizon of your mutual fund. For mutual funds which invest in stocks, your time horizon is at least 10 years and it depends also from the markets where they invest in. You likely need a longer time horizon for mutual funds which invest in emerging funds than these which invest in blue chips or high dividend stocks.
Time horizon is also important if you buy bond funds; there are no bond funds which you guarantee profit within one year but the time horizon will be fewer than these in equity funds. You can find several bond funds with a time horizon between 5 and 10 years but no fund will ever guarantee profit; the chances to make profit are only higher if you respect the time horizon. Bond funds are safer than equity funds but you can also consider a strategy mutual fund with the right mix in stocks and bonds.
* Investment strategy
Risk profile and time horizon are the most important factors to determine your investment strategy. Once you know both factors, you know if you are a defensive, conservative or an aggressive investor. An aggressive investor will invest more in stocks than a defensive investor and it is important to keep your investment strategy under control.
* Choosing the right mutual funds
Everyone wants to buy these mutual funds which reach the highest returns according to their investment profile (defensive, conservative or aggressive). Picking the right ones is not an easy job because you only can view statistics of the past and these are no guarantee for the future. It is still a good indicator if you compare statistics of different time horizons and Morning star rates can help you to choose the right mutual fund(s) for you.
It is also important to check the references of the fund manager and the fees you have to pay when you invest in a mutual fund. The fund manager is the one who buys and sells stocks, bonds and some other assets and his/her references from the past in fund management may be important if you consider to buy a mutual fund. The fees and taxes you have to pay are also important because high fees lower the profit you make. Purchase fees are often 2% and taxes need to be paid if they distribute dividends.
* How to invest in mutual funds
It is possible you’ve bought mutual funds according your investment profile and you don’t succeed to make higher profits than a savings account or even you lose money. The timing of your investment is an important factor. A common mistake is to invest in mutual funds when they reached almost the peak price. An important investment rule is to buy low and to sell high and it is not different with mutual funds. You only have the advantage that mutual funds invest in many companies or even different assets and you minimize the risk of losing money.
Here are some strategies how you best invest in mutual funds:
* Investing in mutual funds through systematic investment plans
You don’t need to invest a high sum of money immediately in one mutual fund. It may be better to invest monthly a fixed amount in a mutual fund and you avoid buying always on peak prices. You buy more entities in some months when prices dropped and chances are high you make more profit than spending the same amount in one month. Nobody knows when your mutual fund is valued on peak price.
* Invest more in equity funds during a recession
Nobody likes a recession because most everyone will struggle to pay all their bills and can’t afford to save as much as they do in good economic times. A recession is either the perfect moment to invest more in equity funds. The value of most stocks are dropped and are often underperformed. If you can afford to invest higher amounts in equity funds, you will make more profit on the long term. A recession doesn’t last forever and it is possible you can make huge profits in a short time.
It is maybe a good idea to save a fixed amount in an online savings account during good economic times and invest this money during a recession in equity funds. It is wise to check the performance of this invested money and sell if they reach excessive high return on a short time.
* Invest in bond funds when the long-term interest rate is low
It may look strange but you best invest in bond funds when the interest rate is low. If the interest rate will drop, the value of your bond funds will increase. The reason is quite simple; nobody will buy these bonds because they get a higher interest rate when they buy new bonds. The fund manager of a mutual fund which invests in bonds loses money if he/she sells the bonds in their mutual funds.
Revision of your investment portfolio is a necessity and need to be done at least once a year. It may happen you invested 50% in equity funds and 50% in bond funds. After one year, you will notice equity funds increased or dropped faster than your bond funds and you have an imbalance to keep your investment profile under control. It may be necessary to sell equity funds and buy bond funds or to sell bond funds and buy equity funds to keep the right mix of your investment in portfolio. It may also be possible you come nearer the age of retirement and you want to lower your risk; in this circumstance you best sell equity funds and invest in safer products.
Making profit with mutual fund is often easier than you imagine. Investigation and some basic knowledge is essential and you best don’t rely only on the advice of your bank because they want to sell their products and offer not always the best solution for you. It may be helpful to consult an independent financial planner before you make the decision to invest in mutual funds.
Mutual funds are often good investment instruments and their popularity has increased rapidly during the last several years. You always need to ensure to invest according to your investment profile and never invest more than you can afford. It is also best you sell mutual funds from time to time if they reach high returns and you are satisfied with the profit. A systematic investment plan in mutual funds is likely the best option to make profit with your mutual funds.