How to Start Investing in Mutual Funds

February 23, 2021 17:49 UTC

Learning how to start investing in mutual funds has become increasingly popular in recent years. And it could be for good reason as analysts predict that the mutual fund industry will grow to $26.8 trillion by 2025!

But what exactly is a mutual fund and what are some of the advantages of investing in mutual funds and some of the disadvantages compared to traditional stock market investing? Read on to find out and learn a lot more!

Investing in mutual funds

In this article, you will learn:

What mutual funds are and how they work.

How to start investing in mutual funds with the likes of Vanguard, Fidelity, Blackrock and others.

The differences between investing in mutual funds vs stocks, and the advantages of investing in mutual funds compared to the disadvantages.

How to start investing in mutual funds with the Admiral Markets Invest.MT5 account with a minimum of just €1 and access low commissions from just $0.01 on US stocks and ETFs.

How to supercharge your trading platform to receive actionable trading and investing ideas in real-time on thousands of different mutual funds using the exclusive Admiral Markets Supreme Edition platform which is FREE to download!

How to get started with a FREE demo trading account so you can test all the features and services offered by Admiral Markets, as well as your own trading and investing ideas in a virtual environment until you are ready to go live. 

And much, much more!

Investing in mutual funds - what are they?

Mutual funds are investment products that pools money together from different investors. The fund then purchases a basket of stocks or bonds or other securities. Essentially, the mutual fund acts as a group investment from multiple investors or shareholders. This allows investors to access different asset classes and baskets of stocks with just one single investment. 

The price of a mutual fund is known as the net asset value (NAV) and is calculated at the end of the day by the total value of all of the securities in the portfolio divided by the number of outstanding shares in the fund. By investing in a mutual fund, investors can gain access to the performance of all of the securities held within it. However, the investor will own shares in the fund rather than the individual securities held within it. 

When investing in mutual funds it is important to know how the fund is managed. Is it an actively managed fund or a passively managed fund? Let’s have a look at the differences. 

▶️ Actively managed mutual fund. These type of funds are managed by an investment manager or a team of managers. Most of the time, these funds have teams of researchers and analysts, as well as several portfolio managers whose job is to outperform its benchmark index, such as the S&P 500 index. 

▶️ Passively managed mutual fund. These types of funds are passively managed and simply track the performance of a market index such as the S&P 500 index. There are no researchers or management teams making any type of investment decision. 

With the Admiral Markets Invest.MT5 account you can invest into stocks and exchange traded funds (ETFs) which have some similarities with mutual funds explained further down this article, from 15 of the largest stock exchanges in the world. 

The account also allows you to access low commissions from just $0.01 on US stocks and you can open an account with just €1. Learn more and open an account today by clicking on the banner below:

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Investing in mutual funds - how do they work?

Mutual funds are usually run by large asset managers. They work by investors or financial advisors transferring capital to an asset management company who then makes an investment for you. These funds are then combined with the funds of other investors to invest in the chosen markets from the active manager or the market index being tracked if a passive fund. 

Some of the largest mutual fund management companies in the world include:

  1. BlackRock Funds. BlackRock is the largest mutual fund manager in the world with more than $8 trillion in assets under management. 
  2. Vanguard Group. This is one of the most well-known fund management companies for retail investors with more than 20 million investors in 170 different countries with more than $6 trillion in assets under management.
  3. Fidelity. This asset management company is actually a multinational financial services company offering a variety of products. Its mutual fund products are well-known with more than $3.3 trillion in assets under management.   
  4. State Street Global Advisors. State Street offer some of the most well-known exchange traded fund (ETF) products called SPDR (Standard & Poor’s Depositary Receipt) and have more than $2.8 trillion in assets under management.

For invest hoping to make a return on their capital with one of these mutual fund companies, the return can come in various forms. The most commonly looked at return is the return on capital invested. Most mutual funds provide a one-year, three-year and five-year historical performance chart and figure to help investors when deciding which fund to invest in. 

Another form of return from investing in mutual funds is from dividends and interest. If a company makes a profit it may choose to share those profits with its shareholders. These payments are known as dividends. Interest can also be paid out when investing in bonds. Both dividends and interest are additional ways for a mutual fund investor to receive a return on their capital invested. 

With the Admiral Markets Invest.MT5 account you can build an income-based portfolio of dividend-paying stocks from all over the world. This account also provides free real-time quotes, premium market research and many other features. Learn more by clicking on the banner below.

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Investing in mutual funds vs stocks

Mutual funds invest in a variety of different markets which is dependent on the goal of the fund and how it is managed. For example, if an investor wanted to gain exposure to China they can choose an actively managed mutual fund, such as the Fidelity China Special Situations PLC or a passively managed mutual fund such as the SPDR S&P China ETF. 

The Fidelity China Special Situations Fund

According to Fidelity’s factsheet for this fund, the objective is “to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China and Chinese companies listed elsewhere.”

The fund management company also provide detail statistics for investing in the fund as well. This includes key stats, price, performance, charges, dividends, portfolio, risk and other categories, as seen below:

Investing_in_mutual_funds_Fidelity_China_Special_Situations_performance

Source: Fidelity, 23 February 2021. Please note: Past performance is not a reliable indicator of future results. 

You can also view a live chart of the mutual fund directly from the MetaTrader 5 trading platform provided by Admiral Markets, as it is an investable asset from the Invest.MT5 account. The long-term, monthly price chart of the Fidelity China Special Situations PLC is shown below:

Investing in mutual funds FCSS.png

Source: Admiral Markets MetaTrader 5, FCSS, Monthly - Data range: from 1 Apr 2010 to 23 Feb 2021, accessed on 23 Feb 2021 at 11:30 am GMT. Please note: Past performance is not a reliable indicator of future results. 

While the long-term uptrend is clear, it also shows very volatile price swings. This is because investing in China and emerging markets can be extremely volatile due to the everchanging conditions in those economies and the fact they are not always easily accessible for ordinary investors. 

Another option for some investors is to look at the constituents of the fund from the factsheet. This details the holdings with the fund’s portfolio. For example, the image below shows the top ten holdings in the fund and includes the likes of Alibaba Group Holding Ltd ADR, Tencent Holdings Ltd and more. In fact, the fund - at the time of writing - holds 160 equities with one bond holding. 

Investing in mutual funds FCSS holdings.png

Source: Fidelity, 23 February 2021.

While some of these stocks may be available to invest in, most of them would not be as China is a closed market. Therefore, the mutual fund allows investors the opportunity to gain exposure to regions that would usually be out of their reach. 

With Admiral Markets you can trade on Chinese shares listed on US exchanges via the American Depositary Receipt (ADR) system. You can learn more about this in the ‘Chinese Stock Market - Investing in Chinese Stocks’ article. 

Did you know that through the MetaTrader 5 trading platform you can view live and historical prices of thousands of different markets from all around the world? Whether you are looking to invest in US markets or European markets or even the currency market you have access to more than 3,000+ instruments from the platform. 

Better yet, the platform is completely FREE to download! Click on the banner below to get started.

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Investing in mutual funds vs ETFs

While many mutual funds are actively managed, there are some that are passively managed and just follow a market index. ETFs, or exchange traded funds, are examples of passively managed funds. 

Mutual funds fall into two categories: open-ended or closed-ended. Open-ended mutual funds have no limit on how many shares they make available. Closed-ended mutual funds offer a fixed number of shares through an initial public offering (IPO). Of the two types, most ETFs are open-ended and passively managed. Let’s take a look at an example. 

The SPDR S&P 500 ETF

The SPDR S&P 500 ETF is one of the largest mutual funds in the world. The long-term, monthly price chart of the fund is shown below:

Investing in mutual funds SPY.png

Source: Admiral Markets MetaTrader 5, #SPY, Weekly - Data range: from 8 Jul 2018 to 23 Feb 2021, accessed on 23 Feb 2021 at 12:30 pm GMT. Please note: Past performance is not a reliable indicator of future results. Last five-year performance: 2020 = +16.16%, 2019 = +28.79%, 2018 = -6.35%, 2017 = +19.38%, 2016 = +9.64%, 2015 = -0.81%.

One of the key differences between a traditional closed-ended mutual fund and an exchange trade fund (ETFs) is that an ETF can be traded like a stock where the investor can buy and sell during market hours. Mutual funds, by contrast, can only be purchased at the end of the day’s net asset value price. 

One other difference is that exchange traded funds are mostly passively managed as they typically track a market index. For example, according to State Street Global Advisor’s factsheet for the SPDR S&P 500 ETF’s aim is “to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.” 

The factsheet provides detailed information for the fund such as its historical performance, top holdings, sector allocation and other metrics. For example, the screenshot below shows the top holdings for the fund as of 22 February 2021:

Investing in mutual funds SPDR S&P 500 ETF holdings.png

Source: SSGA, 23 February 2021

Some investors may choose to trade and invest in the individual stocks within the fund. Other investors may choose to simply invest in the fund itself. It all depends on the chosen investing style of the investor and whether they themselves want to be more active or passive in building their portfolio. 

Another option is to use Contracts for Difference (CFDs) to speculate on individual stocks, ETFs and other markets such as currencies or commodities. CFDs allow traders to speculate on price moving up or down while using leverage. This means you could potentially control a large position with a smaller deposit which has both pros and cons. 

You can learn more in this ‘What is CFD trading?’ article, or click on the banner below to learn more and open an account.

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Disadvantages and advantages of investing in mutual funds

There are many different disadvantages and advantages of investing in mutual funds which depend on the investors’ style. There are also multiple investing styles to choose from such as short-term, long-term, growth-based, value-based, dividend income or capital appreciation and so on. Let’s take a look at some of the benefits of investing in mutual funds and some of the risks. 

Advantages of investing in mutual funds

Here are a few of the benefits of investing in mutual funds:

✔️ Large range of funds available providing diversification. In fact, with mutual funds, there are two levels of diversification. The first is that mutual funds focus on one particular region or sector so you can diversify your portfolio by investing in a technology mutual fund or a pharmaceutical sector-based mutual fund. You also have diversification as the fund will hold a basket of different stocks rather than trying to pick individual stocks. 

✔️ Choice of actively managed or passively managed. Some investors like the idea that there is a professional manager and team of researchers behind the scenes making decisions in actively managed mutual funds. However, some like mutual funds that are passively managed as the management fee, or expense ratio are likely to be lower. 

✔️ Reinvest dividends for compound gains. Profit payments from some companies can be used to reinvest and buy more shares in the fund. This helps to compound gains over a longer period of time, as the income from the investment is growing your investment size. 

Disadvantages of investing in mutual funds

Here are a few of the disadvantages of investing in mutual funds:

Actively managed funds may have high expense ratios. While some investors like the concept of a professional manager and a team of researchers actively managing the fund, the cost of the fund, known as the expense ratio, is likely to be higher. This can eat into your profits in the long run. 

No ownership of individual stocks. When investing in mutual funds you are buying shares within the fund, rather than the individual stocks held within it. Therefore, you have no ownership of anything held within the portfolio and will lose out on any voting rights. 

Too much choice isn’t always a good thing. For some investors, having access to many different types of mutual funds is great. However, for many ordinary investors, too much choice can be overwhelming. After all, reading the factsheets, finding the costs, analysing historical performance for just one mutual fund can be daunting let alone the thousands of mutual funds that are available. 

Having access to the right tools can help deal with some of the disadvantages. For example, the Technical Insight Lookup indicator which is available in the Admiral Markets MetaTrader Supreme Edition platform provides investors with real-time actionable trading ideas across thousands of different mutual funds, stocks, ETFs and other markets such as commodities and currencies. 

The image below is a screenshot of the Technical Insight Lookup indicator searching for the SPDR S&P 500 ETF Trust. At the time of writing, it shows 13 technical events that are taking place in the short-term, intermediate-term and long-term.  

Investing in mutual funds MetaTrader Supreme Edition.png

A screenshot showing an example of searching for ‘SPDR S&P 500 ETF Trust’ in the Technical Insight Lookup indicator from the MetaTrader 5 Supreme Edition platform provided by Admiral Markets. 23 February 2021. 

You can get access to this indicator completely FREE by upgrading to the Admiral Markets MetaTrader Supreme Edition platform. Click on the banner below to get started today!

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Investing in mutual funds, stocks and ETFs

To start investing in your chosen markets, you can follow the steps highlighted below. 

  1. Open your MetaTrader 5 trading platform provided by Admiral Markets or start your free download here if you haven’t downloaded it yet. 
  2. Select the View option from the top menu to open the Market Watch window on the left side of your chart. 
  3. In this Market Watch window, right-click and select Symbols. Here you can search from the +3,000 instruments available to trade on via Admiral Markets. Start typing the name of the instrument and a selection of instruments will appear.  
  4. Press OK to add the symbol to your Market Watch list. To view a live chart of the symbol’s price, drag the text of the symbol from the Market Watch window onto the chart. 
  5. To open a trading ticket, right-click on the chart and select Trading and then New Order. A trading ticket will open up for you to input your own entry, stop loss and take profit levels as well as your position size. 

Investing in mutual funds MT5 ticket.png

A screenshot showing the MetaTrader 5 trading platform provided by Admiral Markets with a trading ticket open on the chart. 23 February 2021.  

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.  

Jitanchandra Solanki
Jitanchandra Solanki
Financial Markets Author, Admirals London

Jitanchandra is a financial markets author with more than 15 years experience trading currencies, indices and US equities. He is an accredited Market Technician with a BA Hons degree.