Mutual funds have become a popular way of investing where it pools money from multiple investors to invest in a diverse pool of stocks, bonds and other securities. Among the many types of mutual funds, index funds have gained major popularity due to their simplicity, low cost and long term growth potential. If you’re new to trading in mutual funds, read on to learn the basics for investing in mutual funds.
What Are Index Funds?
Index funds are a type of mutual fund which tracks the performance of a specific market index like the S&P 500 or the Russell 2000. And they’re designed in such a way that they replicate the performance of the index they track. Instead of being managed by a fund manager, index funds are passively managed which means they automatically track the stocks in a particular index without trying to outperform the market.
Since index funds mirror the market’s performance they have lower fees and expenses than actively managed mutual funds. This makes them an ideal choice if you’re looking for a cost effective option and it’s a good choice for beginners.
How to Trade in Mutual Funds?
Although trading in mutual funds is not as straightforward as buying and selling stocks, with the right knowledge and research you can easily start your trading journey.
- Choose a Brokerage or Mutual Fund Company – The first step is to select a company or brokerage firm that offers the index funds you’re interested in. There are multiple apps for this purpose where you can get access to a wide range of funds including index funds, midcap mutual funds and growth mutual funds. You can compare their fees and check out the variety of funds available.
- Open your Brokerage account – Once the first step is done, you need to create a trading account. It required you to give your personal identification.
- Research and select funds – After setting up your account you should research the different index funds available. Look at their performance history, expense ratios, and the specific index they track. If you’re looking for funds that invest in medium sized companies you can go for midcap mutual funds. And growth mutual funds focus on companies which are likely to grow at above-average rate compared to the overall market or their industry.
- Place your order – Once you’re done with deciding which funds you want to invest in, you can place a buy order through your brokerage account. Unlike stocks, the mutual fund orders are executed at the end of the day based on the fund’s net asset value (NAV) calculated at that time.
- After trading, monitor your investments regularly. Keep an eye on how your index funds are performing and whether they still align with your investment goals.
Trading in mutual funds has several advantages – they are low-cost, need less research and management than actively managed funds, and also provide a broad market exposure which decreases the individual stock risk. They make an easy choice for new investors or people seeking a very passive investment strategy. Once you know how to trade in mutual funds you can build your wealth over time with the right process and research. But always remember to evaluate your investment goals and risk before making any investment decisions.