Once you have made the decision to invest in a mutual fund you need to decide which fund and possibly which company you are going to purchase that mutual fund from.
In the information we are going to go over today one of the mutual funds we hope you have as a cornerstone of your portfolio is an index fund that tracks the S&P 500. We share the belief that having a fund that tracks the S&P 500, is not actively managed, and has the lowest possible fees possible should be in everyone’s portfolio.
Having all of your money in an index fund would not allow you flexibility to save for shorter term goals. These are goals such as saving money for say a car down payment or a house down payment.
If you haven’t completed or read our post on financial goal setting we encourage you to do so.
So let’s get into how to go about selecting a mutual and see what mutual fund you might want to put your dollars to work!
Finding a New Mutual Fund Can and Should be a Fun Experience
This might sound crazy if you are new to mutual fund investing but it should be fun. We believe that once you get into finances you never see things the same again. You will find joy in finding a new fund, adding to it, and monitoring the performance.
We encourage you to start this process with a positive attitude. It will be more fun and entertaining.
What is the Time Horizon Where This Money Is Needed
Knowing when you will need the money you are about to invest is a critical component in selecting a mutual fund. The longer the time horizon you have the more options that are available to you the investor.
What we will cover today is covering choices in a couple of time ranges.
Let’s say after completing the financial goal setting worksheet for multiple goals you had the following:
- 5 years saving for a car down payment
- 10 years saving for a house down payment
These numbers sound like a long time however what you will discover over time is that time will pass regardless and that making steady progress toward your goal is going to feel great.
What is Your Risk Tolerance?
The level of risk you are willing to take is another critical factor in what kind of fund you select for your hard earned dollars.
Many mutual fund companies rate risk from a level of 1 to 5 with 1 being very little risk and 5 being extremely risky. Please consider that time, such as many years, can make funds that appear more risky after first to less risky given time.
With all of that said when you have shorter term goals it’s important to select funds with less risk as they will have less volatility in the short term.
Finding a Good Fund for a Shorter Term Goal
If you are willing to have a little risk and your goal is say in the 5-7 year range a good bond fund may be a great option.
If you have a need for your money in under two years we would recommend a high yield savings account from a good online bank like Capital One or Ally who offer many different options.
Back to selecting a mutual fund that is designed to grow your funds over the long term let’s look at options in the bond fund.
There are bond funds that provide exemptions from state taxes when you reside in those states. As with all items related to taxes please consult your tax professional for all tax related items.
Vanguard offers a selection of funds that have tax exempt status. Looking at a few options in their list we can see a few options for residents in New York, Massachusetts, Ohio, Pennsylvania, and California.
They have different ranges of funds available whether you are looking for a shorter or longer time horizon. While 5-7 years may sound like a long time in bond market terms it’s more on the short to intermediate time frame.
A few of the funds by Vanguard that an investor might consider for shorter term goals might be as follows:
- California Intermediate Term Tax Exempt – 5 year return 4.39%
- Intermediate Term Tax Exempt – 5 year return 3.54%
Reviewing Mutual Fund Options at Different Companies
While we provided options today from Vanguard you as an investor are not limited to selecting from Vanguard. There are dozens of great companies and 1,000’s of options available to you.
At times the options can be overwhelming. We would encourage you to investigate your options and to keep in mind that costs matter and add up so pay close attention to the fees.
- Charles Schwabb – They offer a selection of mutual funds
- Vanguard – You name it they have it. We like to start at their mutual fund asset class page which you can find at asset classes.
