Investing With Mutual Funds: How to Choose the Right One for You

Mutual funds are one of the most popular investment choices some people use when seeking to build a diversified portfolio. Find out why and how to pick mutual funds that align with your savings goals.

Print
https://tickertapecdn.tdameritrade.com/assets/images/pages/md/man with computer- what is a mutual fund
5 min read

Key Takeaways

  • Consider mutual funds to diversify your portfolio and help manage risk
  • Choose funds that align with your goals and investment preferences
  • Use a mutual fund screener to help narrow down your choices

Many people think they don’t have enough money to invest. But it is possible to create a diversified portfolio without breaking the budget. One of the most popular ways is with mutual funds. According to the Investment Company Institute, over 44% of U.S. households owned mutual funds as of mid-2017. Of those, half had income of less than $100,000, and 37% were headed by individuals under the age of 35. 

And if you’re participating in your employer’s retirement plan, you’re probably already investing in mutual funds. Most plans offer a variety of them as part of their investment lineups. 

Let’s take a closer look at mutual fund investments and start to figure out which ones may be right for you.

What Are Mutual Funds? Why Use Them?

Two key reasons people invest in mutual funds are affordability and purchasing power. The minimum investment amount can potentially be as low as $50 depending on the policies of the fund provider. For example, you may have to set up automatic monthly purchases to get the lower minimum. In exchange for this investment, you can gain exposure to numerous stocks and other securities. It can be difficult to get this same type of exposure buying individual stocks with only $50 to invest. 

On top of that, mutual fund investments generally offer:

  • Professional management. Investment professionals research and select the securities for each fund, monitor market and economic conditions, and update the holdings as necessary. 
  • Diversification. Mutual funds typically include individual securities from different companies or industries, which helps to manage risk. On any given day, holdings in a fund that are down might be offset by others that are up.       
  • Liquidity. You can usually request a withdrawal at any time, although you may want to check with the mutual fund provider or your financial consultant first to see if any redemption fees or restrictions apply.         

What Are the Different Types?

If you can think it, there’s probably a mutual fund for it. According to mutualfunds.com, there were more than 8,000 mutual funds in 2017. Most fall into one of these broad categories:

  • Money market. Generally considered a lower risk mutual fund, money market funds invest in cash and cash equivalents such as Treasury bills and certificates of deposit. But there’s typically not as much opportunity for growth or inflation protection. For these reasons, money market funds are often used only for short-term savings or as part of a broader investment strategy.
  • Fixed income. These funds are designed for investors seeking income over growth. They generally consist of government-backed Treasury notes and bonds, and corporate bonds that aim to produce interest and dividend income.
  • Stocks (equities). These funds invest in corporations and are generally used by investors seeking growth who can handle a higher level of risk and market fluctuations. Stock funds can take many forms. Some might focus on smaller companies, while others focus on larger ones or those perceived to be undervalued.
  • Index. This is a type of stock fund that seeks to mimic the performance of a particular market index like the S&P 500 or Russell 2000.
  • Specialty. Specialties are also a type of stock fund, and they tend to be the most aggressive because of their narrow focus. Funds in this category may invest in a specific geographic region or theme, such as technology or the environment.  
  • Multi-asset (balanced). As the name implies, these funds offer a mix of stocks and fixed-income securities. One example that’s often used in retirement plans is target date funds, where the split between stocks and bonds gets more conservative as the designated date approaches. Of course, the principal value of the investment in a target date fund is not guaranteed at any time, including at the target date.    

How Do You Pick A Fund?

With so many mutual fund investments to choose from, it may be difficult to know which ones are right for you. To help narrow down your choices, look for ones that reflect your:

  • Goals. What are you investing for? A new home? Children’s education? Retirement?
  • Investment objective. Given your goals, are you looking to maximize growth? Income? A combination of both?
  • Risk tolerance. Are you aggressive? Conservative? Moderate? The goal is to find investments that match the level of risk you’re comfortable with.
  • Time horizon. How soon will you need the money? For short-term goals, it may make sense to invest in money market or fixed-income funds. Stocks and multi-asset funds are often used to pursue long-term goals because your money has more time to potentially grow. 

Based on your answers to these questions, you can determine which type(s) of mutual fund may be best suited to your goals, objectives, and risk tolerance. For example, if you’re seeking growth and can handle a moderate level of risk as you invest for your child’s college education, you might choose a stock fund that invests in large, established companies. If you’re hoping to put a down payment on a home within the next five years, you might want a balanced fund that aims to provide some downside protection. 

From there, you’ll want to research and compare specific funds within that category. Some factors to consider include: 

  • Investment performance. While there’s no guarantee of future results, a fund’s long-term track record offers clues as to how it may perform under different market conditions. Ideally, you want a fund with consistent performance that aligns with its investment objective.
  • Portfolio holdings. Two mutual funds in the same category can have very different asset allocations. For example, one stock fund might be more heavily weighted in a particular sector or geographic region than another, making it more aggressive or conservative. Look for funds whose allocations reflect your risk tolerance.  
  • Management style. Likewise, each money manager has their own philosophy for how they evaluate and select the securities for their mutual fund. If you’re not comfortable with a manager’s style, it’s probably not the fund for you.
  • Fees. Every mutual fund charges an investment management fee, also known as the expense ratio, that can range from a fraction of a percent to 2% or more. Plus, there may be sales charges and transaction or redemption fees. TD Ameritrade offers a wide assortment of funds that don’t have transaction costs.  

All of this information and more is available on the investment company’s website and in the mutual fund’s prospectus, which you should carefully read before investing. And as you conduct your research, make sure you’re comparing like funds such as bond fund to bond fund.

What Resources Are Available?

You may also want seek information from other sources. TD Ameritrade offers tools and resources to help facilitate your mutual fund research. One is the TD Ameritrade Premier List, which provides top picks* by independent investment professionals at Morningstar. Consider using the list to help evaluate a single fund or to help you build a diversified portfolio with multiple funds. 

Another resource is the TD Ameritrade Mutual Fund Screener, which can help you find funds that match your goals and investment preferences. With this tool, you can create and save your own screens or use predefined ones. 

Mutual fund screener tool
For illustrative purposes only.

Mutual funds offer an affordable way for new and experienced investors to get exposure to the market, build a diversified portfolio, and manage risk. The key is to do your homework, which includes reading the prospectuses, to find funds that fit your goals, investment objective, risk tolerance, and time horizon. To learn more, watch Investing Basics-Mutual Funds.

Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing. 

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

Call Us
800-454-9272

Mutual funds are subject to market, exchange rate, political, credit, interest rate and prepayment risks, which vary depending on the type of mutual fund. Fund purchases may be subject to investment minimums, eligibility, and other  restrictions, as well as charges and expenses.  Certain money market funds may impose liquidity fees and redemption gates in certain circumstances.

Investing in bond funds has principal risks associated with changes in interest rates and the risk of default, when an issuer will be unable to make income or principal payments. 

Investing in equity (stock) funds has principal risks associated with changes in company valuations (total worth) and related stock market performance.

A mutual fund is not FDIC-insured, may lose value and is not guaranteed by a bank or other financial institution. 

*The Premier List represents what Morningstar believes to be the ‘top picks’ funds in each category, from the universe of no-load funds with minimums less than $10,000 and open to new investors available on TD Ameritrade’s platform. 

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The mutual funds selected by Morningstar Investment Management for the Premier List have been derived from a universe of mutual funds made available through TD Ameritrade, a universe which does not include all mutual funds available in the marketplace. Both the universe of mutual funds defined by TD Ameritrade and the Premier List are subject to change at any time and without notice. Particular mutual funds on the Premier List may not be appropriate investments for you under your circumstances, and there may be other mutual funds or investment options offered by TD Ameritrade that are more suitable. Morningstar Investment Management may have more favorable opinions of certain mutual funds which are not included in the universe of mutual funds made available through TD Ameritrade. The Morningstar selections were based on qualitative factors and quantitative analysis conducted by Morningstar Investment Management. The information, data and opinions contained herein include proprietary information of Morningstar Investment Management and may not be copied or redistributed for any purpose. Morningstar Investment Management does not warrant this information to be accurate, complete or timely. Morningstar Investment Management is not responsible for any damages or losses arising from the use of this information. Past performance is no guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. Morningstar Investment Management is not affiliated with TD Ameritrade. 

All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing.


adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.

Scroll to Top