How Mutual Funds Work

Money Management Help for the New Investor

Mutual funds are a popular investment choice for new investors. Buying mutual funds gives investors ownership in a broader variety of stocks, bonds and other investments than they could have accessed on their own.

Risk is also spread out over a large group of investments and among many investors. Professional money managers create and maintain mutual funds, then earn a commission for their services.

How Do Mutual Funds Work?

Registered advisers in banks, trust companies, credit unions, mutual fund dealerships, life insurance agencies, or brokerage firms sell shares of the mutual fund. The money raised by all of the investors is pooled and used to buy stocks and bonds.

Mutual funds are an attractive investment because buying into one fund ensures diversification; the investor's funds are not all tied into a single stock or other investment. Diversifying an investment portfolio helps to protect it against the often volatile ups and downs in the stock market, while still enjoying the potential for a higher rate of returns than lower risk investments or savings accounts.

What Should a New Investor Look For When Buying Mutual Funds?

Speak with a registered financial adviser or planner to determine the amount of money available to invest in mutual funds and the desired level of risk. Equity funds, for example, carry more risk, but also the potential for higher returns. Younger investors might be comfortable investing in equity funds, while those nearing retirement are generally less tolerant to risk and prefer fixed income or money market funds. A qualified adviser will offer several options depending on the investor's needs.

Ask the registered adviser or broker for information on the fund's historical performance. It is more important to see how stable and secure the investment has been over time than how analysts feel it may perform in the future.

Carefully consider the fee structure. The article Understand Fees Before Buying Mutual Funds offers a detailed breakdown of the different types of load, management, exit and administrative fees that will affect the return on investment.

Can New Investors Buy Mutual Funds Online?

Investors can use services such as Questrade or BMO Investor Line to purchase mutual funds online. However, new investors can benefit from the guidance and advice of a registered adviser.

Residents of the United States can use the Securities and Exchange Commission's Investment Adviser Search to connect with local advisers, while Canadians can perform a search with the Financial Advisors Association of Canada.