This is where diversifying your portfolio to include mutual funds (stocks and bonds) can help you preserve and increase your wealth. No, you do not need to be wealthy to invest in mutual funds. You just need to have a determination to expand your financial portfolio.
Perform a Personal Risk Assessment
Not all investors share the same risk temperament. For some, preserving wealth at all costs mean that they will keep their money in a savings account with no risk of loss.
If you are older, you may desire to preserve capital knowing that your retirement years are approaching. If you aren’t young such as in your 20s you may prefer to take a much more aggressive approach. Perform a personal risk assessment to determine the amount of risk you are willing to assume.
Obtain a Prospectus
If you plan to invest in mutual funds, you should obtain a prospectus from a fund’s investor relations office. A prospectus serves as a disclosure document that outlines the company’s business, its financial statements, the biographies of its directors and officers, including their compensation.
The prospectus must also reveal whether litigation is taking place against the company. The Securities and Exchange Commission (SEC) mandates that all mutual funds have a prospectus. Ask for a copy and review it carefully.
Choose Your Mutual Funds
After reviewing the prospectus and uncovering any other information about the mutual fund that you can, then you may be ready to begin your investing. Likely, you will have a choice of mutual funds to purchase with varying yields and values noted.
You should know that some mutual funds are only available through investment brokerage firms. Others allow you to buy and sell shares directly with the mutual fund.
You do not need to invest with just one mutual fund. You can spread your investment to a variety of funds with various goals and risks, such as municipal bonds, corporate bonds and utilities. Consider domestic and international investments to broaden your portfolio.
Understand Capital Appreciation
Investors should familiarize themselves with an important term. And that term is called “capital appreciation.” Capital appreciation along with dividend or interest income represent the two main sources of investment returns.
The way that capital appreciation works is this: if you purchase a share of stock for $40 and it pays a dividend of $4 per share each year and is trading at $50 a year later, then your capital appreciation is $10. That represents a 25 percent increase in the price of your share and with your dividend income coming in at $4 or 10 percent. So, the total return on your shares is $14 or 35 percent.
You should know that mutual funds are not insured by the federal government. You may lose some or all of your investment. If you are looking for a tax shelter, consult with a financial advisor to understand your options.