To narrow down the search for the best mutual funds for beginners, ask yourself questions such as “what are your investing goals.”
There’s a wide world of investment options on Wall Street, and mutual funds are among the most popular and most trusted vehicles. But how do you find the best mutual funds for beginners?
Mutual funds are often the very first investments many of us own as they are diversified, owning a pool of assets instead of just a single stock or bond, and they allow you to rely on expert money managers instead of having to make all the decisions by yourself.
But given the number of options that are available – including Kiplinger’s favorite no-load mutual funds – how do you narrow it down to what is best for you, particularly if you’re just a beginner on your investing journey?
How to find the best mutual funds for beginners
To find the best mutual funds for beginners, look at yourself first. The best mutual fund for you may not be the best mutual fund for your neighbor. Investing decisions are always very personal, so the first step is figuring out exactly what your goals are.
There’s no need to rush! Many beginners make the mistake of getting lost in investment research without a good understanding of what they’re even looking for. So before you dive into the universe of mutual funds, ask yourself a few foundational questions first.
What kind of investment account do you have?
The “plumbing” of your investment account may seem mundane, but can determine what mutual funds you can and cannot buy. Start here so you don’t waste your time learning about a fund that’s not even an option.
For instance, with employer-sponsored 401(k) plans, you can invest your money without paying taxes up front. However, the list of options can be pretty limited with just 10 or 12 total mutual funds to pick from. IRAs do provide more options, as do taxable investment accounts, but come with more complexity.
What company is your asset manager?
Whatever your platform, some mutual funds may come with incentives that set them apart. For instance, Fidelity has some “zero” funds that don’t charge a single penny in expenses – so long as you have an active account with them, of course.
This means you have to consider your specific investment provider, and how it treats certain funds, before looking at what’s out there for everyone.
How much money do you have?
Some mutual funds require you to meet a threshold in order to buy in. This can be as low as $1,000, but other times that hurdle could be significant.
And even if you have enough to buy into one fund, you might not want to be forced to put all your eggs in one basket. This is why knowing the amount of money you have available to invest is so important when figuring out how to find the best mutual fund for beginners.
What is your big-picture investing strategy?
Of course, sometimes putting all your cash behind one specific strategy isn’t a bad thing – so long as you know what you’re getting into. Have a clear sense of what your investing goals are before you look at a group mutual fund investments that may turn out to be non-starters.
Do you want diversification and low-risk returns? Or are you chasing growth and profits, even if that means you could see material losses should the market move away from you? Finding the best mutual fund requires you to think about questions like these – especially as you are starting your investing journey.
Consider style, returns, AUM and expenses
Armed with the answers to these foundational questions, it becomes easier to find the best mutual funds for beginners. Generally speaking, novice investors and those without multimillion-dollar portfolios are well-served by prioritizing a few simple metrics when choosing their investment options. These include:
Style: Mutual funds are labeled based on the assets they hold. This doesn’t just include a label of stocks vs bonds, but also the kind of stocks a fund holds. If you already figured out your strategy and goals, the style of a fund should give you a quick read on whether a given mutual fund is appropriate or not.
Performance vs benchmark: Earning 10% profits sounds great … but consider the S&P 500 Index rose more than 15% through the first eight months of 2023. If you’re settling for 10%, you’re not doing well! The same is true when researching mutual funds. Make sure you’re looking at both short- and long-term performance vs the appropriate benchmark, and not just in a vacuum.
Assets under management: While smaller mutual funds can indeed deliver, beginner investors generally shouldn’t be looking off the beaten trail for unsung heroes on Wall Street. Stick to funds that have at least $1 billion in total assets under management to ensure you’re putting your money into investments that are popular and well established.
Expense ratios: Expressed as a percentage, the expense ratio is the amount you will be charged in annual fees. For instance, 0.10% adds up to $10 annually on $10,000 invested. If you find two funds similar in their makeup and performance, go with the cheaper one. At the end of the day, these lower expenses will help increase your long-term return.