How To Invest – Mutual Funds

No Load Mutual Funds

Another great frugal investing vehicle are no load mutual funds. A mutual fund is basically a collection of stocks and/or bonds grouped together in a portfolio. The fund brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

Mutual funds also carry a lower amount of risk than investing in individual stocks or bonds because each mutual fund invests in a portfolio of several hundred stocks, bonds or money markets; so you’re automatically diversified.

To avoid high expenses, you’ll want to invest in a no load instead of a loaded mutual fund. Both high and low load funds charge you huge expenses in the form of commissions to the broker or financial planner for investing and withdrawing money out of the fund. You will save big bucks going with no load funds that don’t charge these expenses.

Since we’re talking about frugal investing, we have to tell you that the best of the best of no load mutual funds are without a doubt index funds. Since we’re long-term investors, we primarily invest in stock index funds which match the rate of return generated by the market.

You’ll find that stock index funds are far superior investments to the non-index mutual funds for several reasons.

Low Costs

Index stock fund expenses are much lower because they don’t require highly paid fund managers to analyze different stock investments. The index fund just needs to mirror the performance of a specific market index, such as the S&P; 500, which involves minimal analysis.

Bottom line, an index fund will provide you with returns that (average 11% historically) mimic the market for very low fees.

Low Turnover

Turnover is the buying and selling of securities by the fund manager. Many managed mutual funds (non index funds) have very high turnover rates, averaging about 85% a year.

This means that this fund is selling most of their holdings every year. This is not good for you because buying and selling stocks costs money through commissions and spreads. So, a high turnover means higher costs, which will reduce your rate of return.

Again, it’s index funds to your rescue. Index funds have much lower turnover rates meaning you’ll have lower expenses and you’ll receive higher returns as a result. So, if you own mutual funds, or are shopping for them, look to own funds with low turnovers like index stock funds that have a 5% or lower turnover rate.

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