Mutual funds can be a smart place to start investing. Theyre easy to access and dont require you to read any balance sheets or even know what a balance sheet is. Theyre also less likely to leave you high and dry than an individual company, which is more likely to go out of business.

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Mutual funds allow you to turn the selection of individual stocks, bonds and other investments over to professionals. This makes mutual funds a great option for hands-off investors.

Pick an area of the stock market and theres bound to be a mutual fund to help you invest in it. Whether you want to own only the biggest U.S. stocks or the smallest; if you want to invest in China or South America; if you want the security of bonds or the income from real estate without needing to own either directly, there are mutual funds to provide that exposure.

If you have a 401(k) or another employer-sponsored retirement plan, youre probably already investing in a mutual fund or two. Typically these plans default you into a target-date retirement fund, but there are many, many mutual funds to choose from. Heres what you need to know if youre interested in investing in mutual funds:

What are Mutual Funds and Why You Should Invest in Them?

A mutual fund is an investment that pools together a large amount of money from investors to purchase a basket of securities like stocks or bonds. By purchasing shares of a mutual fund you are owning a stake of all the investments in that fund.

Liz Young, head of investment strategy at SoFi, says mutual funds are used by different types of investors and are particularly a great option for beginners or those who have little money to start with.

You can think of them as suitcases filled with different types of securities, such as stocks and bonds. Buying even one share of the fund immediately invests you in all the individual securities the fund holds, she says.

Instead of purchasing individual stocks, which requires time, research and greater risk, you can purchase a mutual fund. Before you decide to invest in mutual funds, its important to know their features. With this single investment you have a portfolio of different securities that automatically diversifies your investments, effectively lowering your risk.

Mutual funds are actively managed by fund managers. These managers conduct research and choose the mutual funds securities based on their investing strategy. Fund managers may use several factors to choose securities, including valuation metrics or historical performance. Fund managers monitor the funds performance and manage the portfolios risk, which makes the mutual fund an ideal investment for a hands-off, passive investor.

You make money with mutual funds when the assets in the fund increase in value. The more the value of the portfolios assets increases, the more money youll make. You can also earn income through dividend payments from stocks or interest from bonds. The difference between the funds expenses and earnings is your net profit. The funds investments can also fall in value, in which case you would lose money.

All investments come with a price tag, but mutual funds are often known for their affordability, accessibility and low barrier of entry.

How Do You Choose Mutual Funds for Your Portfolio?

Given that there are so many mutual funds to choose from, having a checklist of factors to consider can help you narrow down your fund selection.

Your investment goal and time frame. When it comes to choosing which mutual funds to invest in, start with your investment goal and time frame. These two elements will help determine what type of mutual fund you should use.

For instance, if youre investing for retirement 30 years in the future, you can choose a more aggressive (stock-heavy) mutual fund than someone investing to buy a yacht in five years. Generally speaking, the shorter your time horizon, the more conservative your mutual fund should be. Longer-term investors can afford to take on more risk as theyll have time to wait out any stock market declines.

Martha Post, principal and chief operating officer at Team Hewins, says your goals and time horizon are two important variables that can help you determine an asset allocation that works for you.

Asset allocation. An asset allocation refers to the percent of your total portfolio invested in different asset classes, including stocks (small and large, domestic and international) and bonds, Post says.

A younger investor with a long time horizon can take a more aggressive asset allocation approach.

An investor with a 30-year retirement goal who isnt afraid of seeing their investments fluctuate in value between now and then could use a 90/10 or 80/20 asset allocation fund. These will invest 90% or 80% of their assets in stocks, respectively, and the rest in bonds. Less aggressive investors may opt for a 70/30 or 60/40 allocation.

The retirement saver who plans to retire in 30 years could use a 2050 target-date fund. This would start at a more aggressive, stock-heavy allocation but gradually become more conservative as the target date nears.

Its worth noting that while target-date funds are designed for retirement investing, you can use them for any investment goal. One strategy is to choose the fund associated with your end-goal date.

Experts say you want to adjust your asset allocation and grow more conservative with age.

For older investors with a shorter time horizon and likely lower risk tolerance, funds that are well-diversified, less aggressive or those that hold income-producing securities (dividends or coupons) may be more attractive, Young explains.

Cost. Reducing your investment costs is important because as expenses pile on, they can put a tug on returns over time.

In some cases, fees could be a strong drag when comparing a funds performance versus its benchmark since an investor can access indexed funds at a much lower cost, says Nestor Hernandez, portfolio manager Intercontinental Wealth Advisors in San Antonio, Texas.

You should consider management and transaction fees and other operating expenses associated with mutual funds. Investors are subject to fees including sales load, redemption fees, exchange, account and purchase fees as well as annual operating expenses. Look at the funds prospectus to understand the breakdown of the shareholder costs of owning a mutual fund.

Post says investors should avoid funds with 12(b)1 fees, which are costs from marketing and selling mutual fund shares. This operational expense is part of the funds expense ratio, making it hard to identify, which is why 12(b) 1 is associated with issues of transparency.

If youre choosing between funds and it comes down to cost, taking the more cost-efficient option may serve you better down the road.

How to Evaluate Mutual Funds

Once youve narrowed down which mutual funds you want to choose, consider these key items when assessing mutual funds and further narrowing down your options.

Fund managers. The fund managers are the people at the heart of the mutual fund. They are the person or management company responsible for the fund and its investments. Fund managers are responsible for managing the portfolio holdings, executing the funds investment strategy and performing a heavy amount of market research to make sound decisions for the fund they manage.

The people or firm behind the fund are the decision-makers and an important part of the construct, Young says.

The fund managers responsibilities are important because their decisions impact how much money the investor makes. You can learn more about a mutual funds managers by researching the funds fact sheet, prospectus or other resources through your brokerage.

Experts say its best to look for fund managers with years of experience who are familiar with investing in both good and poor market conditions. That way, they know how to help you secure profits regardless of volatility.

Hernandez says certain criteria should be met when making a mutual fund selection.

History, experience, and education of the money manager play an important role in the funds credibility, Hernandez says.

Performance. When evaluating performance, focus on the long term. Look for mutual funds with favorable long-term performance that compare well against other mutual funds investing in the same area of the market. Short-term fund performance can be helpful to consider but may not be as relevant when assessing the long-term prospects of a mutual fund.

It has been easy for mutual funds and their managers to do well in the extended bull market; what will differentiate the best managers is how they performed during stock market declines.

You can find information on a given mutual funds past performance and manager experience on sites like U.S. News & World Reports mutual fund pages or the fund companys own website.

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