Investment Basics: Start with mutual funds

September 1, 2006

They're a great way to get into investing and build a portfolio. Here's what you should know.

You're at the stage in your career where you can think about savings-even with mortgage payments and your practice's expenses, you have money left over each month. But what's the best way to build wealth? And what's your best choice if your knowledge of stocks and bonds is limited?

We recommend you invest in mutual funds, which provide an easy way to invest for long-term growth-with lower risk than buying stocks and bonds individually.

Funds are also convenient to access and use. Most investment companies have websites and toll-free numbers; you can buy or sell your mutual fund holdings any day the financial markets are open. So "liquidity" is another advantage.

Most importantly, mutual funds cover all types of investments: stocks, bonds, real estate, etc., over various sectors of the economy and regions of the world. The number of mutual funds available to individual investors runs well into the thousands. So there's an abundance of choices; too many, some would argue. Moreover, some investment companies have grown large enough to offer "families" of funds, giving you the option of investing in all manner and variety of funds, each with varying risk levels, under one umbrella. These companies are investor-friendly in that you can move your money from one of their funds to another by phone or via the Internet without charge.

A look at the different types of funds

When you're picking funds, keep in mind your long-term investment goals and how much risk you're willing to assume. Which leads us to an essential question-how soon will you need your money? If your answer is "in a few years," you should probably avoid funds entirely, because your holdings won't have time to recover if there's a downturn in the market. (Money-market funds, discussed below, are an exception.) However, if you're investing for your retirement and it's 20 or 30 years away, you can look at more-aggressive funds whose values fluctuate dramatically. You'll have the time to ride out the peaks and dips, and you may be well rewarded for your patience by the time you're ready to retire.

Since there are so many funds to choose from, let's discuss the types that are available, roughly in order of level of risk, beginning with the safest: