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How to Invest in Mutual Funds: A Step-by-Step Guide

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If you’re thinking about investing in the financial markets but wish to take a back-seat approach, mutual funds tick all of the right boxes. 

This is because, once you make an investment, you won’t be required to make any investment-based decisions. Instead, your chosen mutual fund will determine which assets to buy and sell. 

Best of all, there are thousands of mutual funds to choose from, so you’re sure to find one that meets your financial goals. 

In this guide, we explain how to invest in mutual funds from the comfort of your home. 

How Do Mutual Funds Work? 

Before we explore the nuts and bolts of how to invest in mutual funds, we’ll start by explaining how this popular investment vehicle works. 

Put simply, mutual funds are run by large-scale financial institutions. Think along the lines of Fidelity, Vanguard, and Charles Schwab. The mutual fund investment process is quite straightforward. 

Your chosen provider will pool investor funds together and then use this capital to buy and sell a range of financial instruments. 

In some cases, the fund will track a particular marketplace, such as the S&P 500. Alternatively, if you invest in an active mutual fund, it will have a specific strategy in place, such as a focus on high-yielding dividend stocks or corporate bonds. 

Either way, the mutual fund investment process from your perspective is completely passive. Once you have chosen a mutual fund and completed the investment, you can then sit back and allow the provider to manage your capital for you. 

You can make money with mutual funds either through quarterly dividends or a rise in the NAV of the respective mutual fund. 

Investing in Mutual Funds in Six Simple Steps

Now that we have covered the ins and outs of how this investment vehicle works, let’s walk through how to invest in a mutual fund in six simple steps. 

Step 1: Determine Your Goal and Risk Tolerance

With thousands of mutual funds to choose from, you should initially think about your financial goals and attitude to risk. In other words, how much money are you looking to make by investing in a mutual fund and how much risk are you prepared to take to get there?

For example, a mutual fund that invests in high-grade stocks and US Treasuries will likely come with a modest yield. But, at the same time, the risks will be lower. 

At the other end of the spectrum, a mutual fund that focuses on emerging market stocks and low-grade bonds will look to target much higher returns. This means the risks will also be higher.   

A good way to gauge that all-important risk vs reward trade-off is to look at the type of markets the mutual fund targets. 

In some cases — either through your online broker or directly from the fund provider’s website — a risk score will be given. This makes it a bit easier to assess how much risk you will be taking with the mutual fund in question. 

The good news is that mutual funds are typically less risky than picking individual stocks, this is because mutual funds include hundreds of stocks to ensure your investment is protected from the poor performance of a particular security.

Note: Generally speaking, mutual funds are best for longer-term goals. ETFs, on the other hand, can be considered for short-term goals.

Step 2: Define Your Investment Style (Passive vs. Active Funds)

We briefly mentioned the difference between a passive and active mutual fund earlier, but allow us to elaborate. 

Passive mutual funds operate in much the same way as conventional ETFs. This is because mutual funds track specific markets. 

They can track a stock market index like the Nasdaq Composite or the Dow Jones. Either way, the passive mutual fund will not look to outperform the market. Rather, it will look to track it like-for-like. 

Active mutual funds, on the other hand, will look to outperform the market. It will do so in a much more flexible manner, like, for example, by buying and selling assets as and when the fund manager sees fit. 

By choosing an active mutual fund, investors have a better chance of generating above-average market returns. But, equally, the fund could just as easily finish the year worse off than the market benchmark.  

Step 3: Establish a Mutual Fund Investment Budget

Thanks largely to the growth of fractional ownership, no longer do you need to spend hundreds of dollars on a single stock investment. 

However, mutual funds are somewhat different. The minimum investment amount is usually stipulated by the provider itself. This can vary quite widely, so it’s important to first assess what your investment budget is. 

To give you an idea, the likes of Vanguard will typically require a minimum lump sum of $500. If you have $5,000 to invest, you could diversify with ease. 

In other words, you can invest in several mutual funds with varying objectives instead of putting all of your eggs into one basket.

Note: You will often find that the minimum investment amount required to open an account to invest in mutual funds is lower when going through an online broker than it is when completing the process directly with the mutual fund provider.

Step 4: Decide on a Mutual Fund Type

Generally speaking, there are four types of mutual funds you can invest in, they are:

Stock Mutual Funds

Otherwise referred to as equity funds, stock mutual funds will focus exclusively on publicly-listed companies. 

As you can imagine, the types of shares held within a stock mutual fund can vary considerably. With that said, the fund will usually have a specific objective. 

For example, a mutual fund might look to focus on large-cap stocks. In other cases, it might opt to target growth stocks or stocks located in emerging markets. 

Irrespective of which stocks the mutual fund holds, you’ll be entitled to your share of dividends, which, as noted earlier, will be distributed quarterly. 

Bonds Mutual Funds

As the name suggests, bond funds focus exclusively on bond instruments. Once again, there are many different markets that the mutual fund might target. 

For example, while low-risk bond funds might only invest in strong government bonds (T-Bills, UK Gilts, etc.), a higher-risk fund would look at bonds issued in the emerging markets.  

In other cases, the bond fund might focus on corporate bonds. There are also mutual funds that will take a more diversified approach by holding bonds from a variety of markets and economies. 

Balanced Mutual Funds

If you want to gain exposure to both stocks and bonds, it’s worth considering a balanced mutual fund. The fund provider will hold a diversified basket of both asset classes, usually at a pre-defined split. 

For example, they might opt for a 70/30 split in stocks and bonds, respectively. Balanced mutual funds will also have an objective, such as focusing on stocks and bonds that generate a high dividend/coupon yield. 

Money Market Mutual Funds

This particular type of mutual fund is best suited for those that have a lower tolerance for risk or simply want to hedge against the wider stock and bond markets.

This is because money-maker mutual funds focus on high-grade, low-risk, debt instruments. These typically come in the form of US Treasuries and certificates of deposits issued by large banks.

The yield on money market mutual funds will be somewhat unattractive. But, of course, the risks are significantly lower.   

Step 5: Choose the Right Brokerage

Although some mutual fund providers allow you to invest directly, retail clients will typically go through a trusted online brokerage. This is because account minimums are usually lower — as are fees and commissions.   

As you likely know, dozens of online brokerages offer mutual funds, so you need to do some homework before opening an account. 

The most important things to look out for are:

Supported Mutual Funds

First and foremost, you need to ensure that your chosen brokerage supports the mutual fund that you wish to invest in. 

This can be ascertained fairly easily as most brokers display the financial instruments that they support on their website. 

Account Minimums

This particular metric goes back to our earlier discussion on assessing your mutual fund budget. Put simply, you need to check what the minimum investment is on the mutual fund that you are interested in.  

Fees and Commissions

Mutual fund fees are a bit more complex in comparison to those associated with individual stock purchases. This is because you are likely to be charged a fee both by your brokerage and the mutual fund you’re investing in. 

  • For example, most online brokerages will charge a flat fee to invest in mutual funds. You’ll pay this when you invest and again when you cash out. 
  • Additionally, your chosen brokerage might charge an annual platform fee, which is multiplied against the amount you have invested. 
  • The mutual fund provider itself will charge a fee — otherwise known as an expense ratio. This is expressed as a percentage, which is multiplied by your total investment. 

The brokerage will, of course, pass this cost on to you. 

Payments and Security

Don’t forget to check what payment methods the brokerage supports. Most platforms require you to transfer funds from your checking account, which can take a couple of days to process. 

Some brokerage sites also support debit/credit cards and e-wallets, albeit, this is less prevalent in the US. 

Additionally, make sure that your chosen mutual fund brokerage is regulated by the relevant bodies. This will ensure that you benefit from a range of inverter protections, including the likes of the SIPC. 

Tip: Make sure you always request and review the mutual fund fact sheet which is basically a three-page document overviewing the fund. This sheet includes things like fees, risk analysis, and returns.

Step 6: Manage Your Portfolio

The final step involved in the mutual fund journey is to manage your portfolio. This simply means keeping tabs on how your chosen mutual funds are performing and assessing if and when it’s time to cash out. 

If you are looking to meet long-term financial goals, it’s also worth considering making regular investments. That is to say, you might consider investing $500 into your chosen mutual fund(s) at the end of each month. 

Most importantly, don’t forget about your dividends. The most seasoned of investors will create a dividend reinvestment plan. This means that when you receive your quarterly dividends, you reinvest the funds back into the mutual fund (or another asset class).

This will ensure that your money grows at a much faster rate via compound interest

Benefits of Mutual Funds

The main benefits of investing in a mutual fund are as follows:

Passive Investment

When investing in a mutual fund, you are doing so passively. 

Other than the process of selecting a mutual fund, you are not required to make any investment-based decisions. That job is left to the mutual fund manager. 

Experienced Fund Managers 

Although there is a thrill to picking and choosing your investments, sometimes it’s best to leave it to the experts. By investing in a mutual fund, the respective provider will have vast resources at its disposal. 

Amongst many other things, these resources include experienced fund managers and traders that likely understand the markets a lot better than the average retail client. 

Great Fees 

There is often a misconception that mutual funds are expensive. However, many leading mutual fund providers charge an expense ratio of less than 0.5% annually. 

This offers great value when you consider that you can sit back and allow the fund manager to research the markets and invest on your behalf. 


In the vast majority of cases, your mutual fund investment will be super-liquid. 

This means that you can usually request to exit the investment at any given time. When you do, the provider will usually transfer the funds to your brokerage account the very next working day.  

Note: In a nutshell, mutual funds allow you to diversify your portfolio and provide a hands-off approach to investing while lowering your risk.

Risks of Mutual Funds

Although there are many benefits to investing in mutual funds, several drawbacks also need to be considered. 

Backseat Investing 

While many investors will like the passive nature of mutual funds, individuals do not have a say in which assets are bought and sold by the instrument they’ve thrown their weight behind. This means that anyone investing in mutual funds couldbe missing out on other investment opportunities. 

Higher Minimums 

Several brokerage sites now allow you to invest in stocks with just $1. This is known as fractional ownership as it’s great for those on a smaller budget.

However, no such mechanism exists in the mutual fund scene, meaning you’ll need to meet a much higher minimum. 

Experience Doesn’t Guarantee Success 

On the one hand, by allowing an experienced mutual fund manager to make investment decisions on your behalf, you are giving yourself the best chance possible of outperforming the market.

However, success is far from guaranteed. On the contrary, there is also the likelihood that the mutual fund you chose will finish the year at a loss.   

Note: Keep in mind that there are a number of alternatives to investing in mutual funds, one of which includes investing in exchange-traded funds (ETFs).

FAQ: How to Invest in Mutual Funds

Below you will find a selection of frequently asked questions about mutual funds. 

How Do You Make Money with Mutual Funds? 

When investing in a mutual fund, there are two ways that your money can grow. Firstly, the NAV of the fund will rise and fall in conjunction with the assets held in the respective portfolio. 

In other words, if the mutual fund invested in Apple and the stock rises in value, this would have a positive impact on the NAV. As the NAV increases, so will the value of your investment. 

Secondly, mutual funds allow you to earn dividends. This will be the case if the fund is holding stocks that pay dividends or coupon-yielding bonds. Your share will be distributed to you every quarter.

How Do Mutual Fund Dividends Work?

Like ETFs, mutual funds usually distribute a dividend every three months. The proceeds come from the assets held within the fund. 

For example, this might consist of stocks that pay dividends or bonds that yield coupon payments. Either way, as an investor in the mutual fund, you will be entitled to your share of any dividends the provider receives. 

To illustrate this with an example:

  • You invest $10,000 into a mutual fund that invests in both stocks and bonds.
  • At the end of Q1, the mutual fund generates 1.5% in dividends.
  • In turn, you will be entitled to receive a dividend payment of $150 for the $10,000 investment in that mutual fund. 

Assuming you invested in the mutual fund via an online broker, the payment will be reflected in your brokerage account. 

What Is the Mutual Fund NAV?

The Net Asset Value (NAV) of a mutual fund is simply the value of all assets held at the current market value. 

For example, if the mutual fund invested primarily in stocks, the NAV would look at the total number of shares and then multiply this by the closing share price at the end of the trading day. 

In simple terms, if the assets that the mutual fund invests in are performing well, the NAV will increase and so will the value of your investment. 

In many ways, this works in the same way as achieving capital gains on a stock or ETF. 

To illustrate this with an example:

  • You have invested $5,000 into a mutual fund that invests in stocks.
  • At the time of the investment, the mutual fund has a NAV of $2 billion.
  • Over the course of the first year, the stock markets have remained in a bullish upward trend.
  • As such, the NAV of the mutual fund now stands at $2.2 billion.
  • This means that the NAV has increased by 10%.

As you invested $5,000 into the mutual fund, a 10% rise in the NAV means that your money is now worth $5,500. However, unlike with dividends, you won’t be able to realize these gains until you cash out your mutual fund investment.

Can I Lose Money with Mutual Funds?

Like any financial investment, there is no guarantee that you will make money. Your success will be determined by the decisions that the provider in question makes. 

For example, if the provider invests in a basket of blue-chip stocks and the wider markets are bearish, there will likely be a drop in the fund’s NAV. 

Ultimately, if you exit your mutual fund investment at a lower NAV than when you started, you will lose money. 

Final Thoughts

If you’re looking to avoid the stress of picking individual investments and when to time the market, mutual funds will likely be of interest. 

Once you invest in your chosen fund provider, there is nothing else for you to do. This is because the mutual fund will determine which assets to buy and sell and when.  

If this aligns with your long-term financial goals, the most important thing you need to do is perform lots of research on the mutual fund before taking the financial plunge.  

After all, there are thousands to choose from.

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