Investing in open-end mutual funds is relatively easy. All you have to do is choose a fund, enter a standing order in your bank and have the money sent.
However, even seemingly simple things can prove insurmountable for an inexperienced investor.
Everyone can send money to an investment company. However, any beginning investor should consider five possible complications that they may encounter when investing.
#1 Wrong choice of mutual funds
There is a lot of information about mutual funds. To avoid possible disappointment, it is necessary to become familiar with the types of mutual funds. It is a big difference to invest in a bond fund and expect returns as in equity mutual funds.
The mixing of mutual funds is also related to their mixing. For example, you can cover investments in equity funds that buy shares in companies doing business in Central and Eastern Europe through one fund of one investment company. You don’t have to have two funds from two different investment companies. The result is the same.
Portfolio managers who take care of their funds usually buy only quality stocks and do not pay attention to risky companies. However, if it is a hedge fund, the situation is different. However, you should know that a standard mutual fund, investing in bonds or shares, for example, buys only high-quality underlying assets. An important part is to study the fund’s prospectus, in which you will read what the fund focuses on and what its portfolio consists of.
#2 Wrong choice of invested amount
The investor’s mistake also seems to be bad or inappropriately chosen amounts invested in mutual funds. Many people think that when they send a hundred, they are big investors. The decisive factor is whether the amount invested does not limit you too much.
Many people invest based on their income and set, for example, five percent of their monthly net salary for investing. Before you start investing, you should save a financial reserve equivalent to a few monthly salaries. This is in case you find yourself in a difficult financial situation (for example, job loss, illness, unexpected increase in expenses) and you are forced to withdraw your money from investments.
#3 Sales at the most inopportune moment
Many investors do not have a clear investment strategy. The moment the markets are at the bottom, they sell and when they are at the top, on the contrary, they buy en masse in the belief that the market will continue to grow.
The beginning of the investment is difficult to estimate, but the sale can be easily handled. If you sell unit certificates of funds in which you have money, try not to make money on sales or not to make too much money.
A simple, but for many people also a time-consuming tool, is to keep statistics on when you bought what and how much. In practice, this means that you will keep notes of your purchases, both in terms of the volume of units purchased and the amounts invested. If you decide to sell, you can look at your notes to see if the price is at least close to the purchase price.
If you overcome the initial panic, you should shop during the declines. You don’t even have to adjust the amount invested. If the markets are down, it means you get more for the same money. If your risk is not working well, you can temporarily cancel standing orders and not buy anything. You can redirect money to a savings account, for example. However, you should avoid selling your fixed assets.
#4 Investment fees
Investment companies collect fees. These are divided into several groups. you can pay from each amount invested or from the annual management of the fund. It is advisable to take into account the fees. If the fund takes two percent of each investment, it is advisable to send an amount that takes into account this fee.
Example: A monthly investment in an equity mutual fund is $ 500. The fund will cut two percent of that amount, which is $ 10. To make your investment exactly $ 500 and no less, you need to send at least $ 511 to the fund. The imaginary one crown operates with the fund cutting a fee from each amount you send it.
#5 Swapping savings and investing
People often confuse investing with savings. When investing, you are lured by a higher return than savings. At the moment when the value of their investment portfolio decreases, they are surprised that, in addition to the absence of income, their principal also decreased. This cannot happen with savings.
Investing is risky for the entire amount invested. Your deposit changes over time and no one can be sure that it will retain its value. In addition, investments in mutual funds are not insured in any way, as is the case with deposits.
However, even because of this risk, you should not curse your investment. The main role is played mainly by the basic knowledge of the functioning of mutual funds and the economy.