One of the best ways to save for retirement is to invest in mutual funds. Mutual funds can be very complicated and scary, but with the proper information can be one of the most successful elements of your investment portfolio. Here is some of the information that you need to know if you want to invest in mutual funds:

The Basics.

Mutual funds are basically pools of money that are used to buy stocks in companies. The manager of the mutual fund takes the money and buys stocks in companies that he/she believes will be profitable, and companies that are in line with the theme or strategy of that fund. In exchange for this management, he charges an MER (management expense ratio) which is usually between 1 and 3 percent. This is taken off of the performance of the fund, so if a fund says it made 10% in a year, it really made 12% minus the 2% MER. If the companies that the manager invests in increase in value, the fund increases in value and you make money. If the companies lose value, you lose money. The amount of gains and loses are lowered because the money is spread out into a number of different companies. To explain this further, think if you had all of your money in one wallet, if you lost that wallet, you wouldnt have any money left, but if you had 2 wallets, if you lost one, you would still have half of your money left.

Some funds have themes that may vary based on the risk involved in the investment strategy. The higher the risk, the greater the potential to gain or lose money. The risk decreases over time, so if you have a long time to invest, you can take more chances. This concept is explainable by looking at the stock market indexes. They may increase or decrease in any given year, but over the long term (20+ years) will almost always increase, even if you include the stock market crashes.

Investing in the stock market is very complex, and most people do not have enough money to create a proper stock portfolio that is well diversified and protected against loss. Mutual funds allow normal people to be able to invest in a diverse portfolio that is managed and picked by professionals who know how to properly invest.

The Nuances.

The specific banks that own a mutual fund will often let you trade the funds for free if you buy their fund through their institution. If you buy mutual funds through a broker, they will charge you trailer fees, or brokerage fees. This is in addition to the MER (Management expense fees) that are already being charged to the fund.

With mutual funds, it is important to note that past performance does not dictate future performance. Many people think that if a fund has always increased in value year after year, that it will always continue to do so. This simply is not true. Funds can vary significantly over time, and if everything is working well, will hopefully increase in value as an average. One fund that I have seen lost 5% for 3 years in a row, and then gained 200% one year, then went back to losing money again. If you invested in this fund for three years and then quit, you would lose money. If you invested in it for longer than that, you would gain money as an average. The mistake that people make is to try to get figure out when the fund will make that big gain, rather than invest for the long term.

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