INVESTING IN MUTUAL FUNDS FOR BEGINNERS

Nestor Hernandez, Portfolio Manager at Intercontinental, was recently quoted in this U.S. News & World Report article called "Guide to Investing in Mutual Funds for Beginners”, and wrote this blog post as a follow-up piece with his full thoughts:

Mutual funds are a regulated and diversified pool of investments where investors allocate money. These are managed by a professional money manager and hold public securities like stocks and bonds. Shareholders of the fund (investors) participate proportionately in the fund’s investments. Each fund has a different objective and hence return expectation.

How can you use mutual funds to gain exposure to a specific area of the market?

There is a huge variety of mutual funds in the market. These can vary by sector, investment style, and return profile. Investors can efficiently gain exposure to different sectors of the market via diversified mutual funds with relatively low amounts of money. An investor can play an “active” exposure to a specific segment by investing in a strategy or sector for which a manager has expertise. One such example is an emerging markets mutual fund. An investor can have diversified exposure in those markets by purchasing shares of the mutual fund and trusting that the manager’s decisions are based on their strong knowledge of the region.

If investors use time horizon and investment goals as part of their strategy when choosing mutual funds, what are some mutual fund examples for a younger vs. older investor?

Productive life span is a very important factor to consider when making an investment. Younger investors have more time to recover from losses, since they could continue generating income through employment or other means. Older investors might not have the same time to recover from swings in the markets. Younger people should have a higher tolerance to risk as they have a longer investment horizon. Consequently, they should invest in growth opportunities in the long run. These include mutual funds for growth stocks, emerging market stocks, and smaller capitalization companies. Investing in capital preservation might be a better objective for those people who are retired, or closer to retirement. These include blue chip world stocks, corporate bonds, and treasuries. 

Picking a mutual fund can be intimidating given that there are an array of mutual fund options to choose from. What are some factors (i.e., performance, fees, investment strategy, etc.) to consider and why?

Performance, fees, and investment strategy are all important factors to consider when choosing mutual funds. Recently, fees have been a significant concern to investors as it directly affects their total return. In some cases, fees could be a strong drag when comparing a fund’s performance versus its benchmark since an investor can access indexed funds at a much lower cost. Therefore, fees and performance need to be evaluated closely in order to make a prudent decision on the mutual fund selection. It is also important to consider the investment objective, concentration of holdings, and volatility of its performance. History, experience, and education of the money manager play an important role in the fund’s credibility.

In summary, mutual funds offer a diversified approach to investors and allows them to invest in multiple markets and segments by purchasing a few fund names. Investors can create an investment portfolio with various mutual funds that specialize in different strategies. Important things to consider when making a fund choice include volatility, costs, investment style, history of the fund, and investment time horizon. This way, investors will have a diversified investment portfolio that is easy to manage when compared to only owning individual securities.

Sincerely,
Nestor Hernandez
Portfolio Manager at Intercontinental Wealth Advisors