How to invest in mutual funds: The complete guide

Investing in mutual funds is a popular way to grow your wealth over time and for good reason. It's a simple, accessible method to diversify your portfolio with professional management. Whether you're saving for retirement, building an emergency fund or seeking long-term growth, mutual funds allow you to conveniently pool your money with other investors to collectively own a range of stocks, bonds or other securities.

Read on to learn how to invest in mutual funds, from defining your financial goals to monitoring your progress and making informed investment decisions.

A mutual fund is an investment where you pool your money with other investors to buy a collection of stocks, bonds or other securities. By contributing to the fund, you gain a "mutual" ownership of a diverse portfolio, which helps spread out risk compared to investing in individual stocks or bonds on your own. Professional fund managers handle the buying and selling of securities within the fund, aiming to generate returns for all investors.

Returns from mutual funds come from two main sources: capital gains, which occur when the value of securities increases, and dividends, which are payments companies make when they share their profits. However, mutual funds also come with management fees and other expenses, which are deducted from your returns.

The process of mutual fund investing begins with some simple but crucial financial planning steps, followed by opening a brokerage account and monitoring and managing your funds. Here's a breakdown of how to invest in mutual funds, organized into five key steps:

Start by understanding why you're investing. Are you saving for retirement, growing your emergency fund or trying to build wealth? Mutual funds have different focuses; some may be best for long-term growth, while others emphasize income or stability, so defining your goals will help you choose the right ones for you.

Your time horizon—how long you plan to keep your money invested—also will influence the types of mutual funds that fit your needs. Longer-term goals typically allow for more risk, while short-term goals may require more conservative choices.

Knowing your risk tolerance is crucial before investing. Mutual funds range from conservative (less risk, lower returns) to aggressive (higher risk, higher returns). If you're comfortable with market fluctuations, growth or stock mutual funds might suit you. If you're more cautious, bond or balanced funds may be better options. Assessing your comfort level with risk will give you the confidence to stay invested, even during periods of market volatility.

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You likely have goals for your money. How you want to use your money can factor into how much risk you can withstand. Answer seven questions to uncover how your risk tolerance shapes your investment style.

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Figure out how much you're willing to invest and how often. Many mutual funds have minimum initial investment amounts, which can range from $50 per month via a systematic investment plan to $3,000 or more as a minimum initial investment. Decide if you want to invest a lump sum or set up recurring contributions.

Consistent investing through methods like dollar-cost averaging, where you invest the same amount regularly regardless of market conditions, may help reduce the impact of market volatility over time.

To invest in mutual funds, you'll need to open a brokerage account. This can be done through online brokerage firms, banks or financial advisors. Mutual funds are also the primary investment type available in 401(k) plans, which are employer-sponsored. When choosing a broker, consider their fees, account minimums and the range of mutual funds they offer. Many brokers provide online access as well as educational resources and tools to help you monitor and make informed decisions about your investments.

Once your account is set up, search for the mutual funds you're interested in, reviewing details like performance history, investment strategy and the fund's prospectus. Before purchasing, make sure you review the mutual fund fees, which are typically listed as the expense ratio—a percentage of your total investment charged annually to cover management costs. You can find this information on the broker's platform or in the fund's prospectus. Additionally, check for any front-end or back-end sales charges (called loads), which some funds may have.

By reviewing both expense ratios and potential loads, you can ensure that you're selecting a mutual fund with fees that align with your investment goals.

Here's an overview of the basic mutual fund types, including stock funds, bond funds and index funds, along with a brief explanation of active vs. passive management:

• Stock funds invest primarily in company stocks, aiming for capital growth; they come in different styles like growth, value, or dividend funds.

• Bond funds focus on fixed-income securities like government or corporate bonds, providing more stability and income than stock funds.

• Index funds are investment funds that aim to replicate the performance of a specific market index by investing in the same securities in the same proportions. They're just one example of passive funds, which lead to lower fees and generally more consistent returns in the long run. (Actively managed funds are managed by a professional with a goal of outperforming the market, often resulting in higher fees.)
  

After investing in mutual funds, it's important to monitor their performance periodically. Look at annual returns, compare them to relevant benchmarks, and ensure they align with your original goals and risk tolerance. Over time, you may need to rebalance your portfolio or switch funds if your financial situation or goals change. If you're working with a financial advisor, they'll monitor the funds as part of their overall management services.

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You can purchase mutual funds on your own, or with the help of a Thrivent financial advisor. Start investing with as little as $50 a month.


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To evaluate a mutual fund, start by reviewing its past performance, focusing on annualized returns over several years. Compare these returns to relevant benchmarks, like the S&P 500 for stock funds. Analyze the fund's expense ratio, which represents the annual fees deducted from your returns. Lower fees generally lead to better net performance over time. It's also essential to assess the fund's risk profile by examining the types of assets it holds and the fund manager's strategy.

Mutual funds typically report annualized returns, which reflect the average return per year over a specific time period. While historical performance doesn't guarantee future returns, strong long-term returns relative to peers and benchmarks may indicate a potentially good investment.

Finally, consider how the mutual fund aligns with your investment goals, such as long-term growth or income, and understand the pros and cons of investing in them:

• Diversification. They allow you to diversify by owning a broad mix of stocks, bonds or other assets, spreading out risk.
• Professional management. Experienced managers make investment decisions for you, aiming to optimize returns.
• Low minimums. Many mutual funds have relatively low initial investment requirements, making them accessible.

• Fees. Management fees (expense ratios) and potential sales charges can eat into returns over time.
• Taxes. Mutual funds may distribute capital gains or dividends that result in taxable income for the investor.
• Performance variation. Some mutual funds may underperform their benchmarks.