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How do mutual funds work step by step

These financial fund products are an excellent way to put your money to work, although before you start investing you need to know a few details that we tell you below.

Mutual funds are not products reserved for large capital and yet many small savers consider that this way of investing is not for them. Actually, thanks to the huge variety of mutual funds that exist in the market, practically anyone can grow their money thanks to these investment instruments. Of course, before it is necessary to know a series of ideas to be able to make the best decision.

How much risk are you willing to take?

Any investment, even the safest, carries a risk. It is one of the maxims of mutual funds. This does not mean that if the investment goes wrong, you will lose all your money, but you will not get the expected profitability or, worse, that you will lose a percentage of what is deposited in the fund.

Hence one of the first criteria to choose an investment fund is the risk associated with it. In Spain, this risk is measured on a scale of 1 to 7, with 1 being the lowest possible risk and 7 being the maximum risk. Having said that, why would anyone want to put their money in a 6 or 7 venture fund? Mainly, because of the higher the investment risk, the greater the potential profit or profitability, we can get for our money.

It is for this reason that when a saver invests in Treasury Bills – to give an example – the profitability they can expect is very low, but so is the risk of losing money or not recovering their investment.

Speaking of mutual funds, it is important to note that there are several types of fund depending on what they invest the money. Based on this criterion we find three main types, the most common in the market: fixed income, equity and mixed funds. Thus, while fixed income – mainly debt of countries or administrations – has lower associated risk and lower return, equity – stocks and shares of large publicly traded companies – tend to have higher returns and also greater associated risk.

For this reason, before starting to look for mutual funds and ask for advice, the saver must consider to what extent is willing to risk their money.

How long are you going to keep investing?

Directly linked to the risk we find another variable, the time that we will maintain our investment. Normally, the funds offer data on their profitability at 1, 3 and 5 years, and is that this type of investment products are not intended for customers seeking benefits in the short term, but over several years.

That is why, when investing in one of these funds, the client must analyze if he will need that money soon or, on the contrary, can do without it for a long period of time.

Yes, it is important to indicate that, unlike other products such as pension plans, in investment funds, the customer can always take their money, although it runs the risk of not achieving the desired profitability.

In addition, one of the most widespread ideas is that the higher the fund’s risk, the longer the money invested should be. This is because, in the event that the fund has a negative profitability during the first years, in the long run, it is not normal for the investment to recover and even to make a profit.

What profitability can you expect

When it comes to depositing the money in an investment fund it is important to control the expectations of profitability that is expected. Although there are funds that have reached peaks of return of 20% per year or even more, the vast majority of mutual funds usually offer returns ranging from 1 to 5%. That is why it is important that the investor is clear that he will not double his money in one or two years. Usually, mutual funds are like a background race in which, the longer you stay, the greater the gains can be.

The costs of the fund

As with other banking products, mutual funds are also associated with the payment of a series of commissions. The most common are management, deposit, subscription, and reimbursement. When choosing a fund, commissions should be another factor to take into account, since if they are very high, they may end up ‘eating’ a good pinch of our profit.

Compare funds and seek advice before investing

In the market, there are investment funds of all kinds and destined to all types of clients, so it is important to take time to analyze which is the most suitable for us. This can be done, for example, through the cooperators and searchers of investment funds that exist on the internet.

In this search engine, you can select investment funds for their profitability at 1, 3 and 5 years, because of the associated risk they have or the minimum investment needed to enter, among other variables.

In addition, it is essential that you consultants in one of the offices of your bank, mainly, to resolve all those doubts that may arise to the first-time investor.

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