When Is It Good to Buy a Mutual Fund?

There is not truly a bad time to buy a mutual fund, but some environments are more favorable than others for the fund's typical models. Keep in mind that there are many different types of mutual funds. Some can be aggressive, such as absolute value funds, that use strategies similar to hedge funds to play the markets. Others, though, are very safe, mostly purchasing bonds and growth stocks. The average mutual fund, though, attempts to balance risk through a variety of investments in a balanced portfolio, making it a sound investment in nearly any market.

Purchase Mutual Funds for a Nest Egg

A nest egg is the term commonly used to describe the investment that will eventually provide for your security. A nest egg is usually spent on a first home. If you intend on using profits from a mutual fund for your nest egg, you should consider buying shares in the fund early. The younger you start, the more the profits will grow by the time you are ready to own a home. Considering most mutual funds grow at a constant but not aggressive pace, it can take ten years to grow a down payment for a home out of a $5,000 to $10,000 investment.

Purchase Mutual Funds for a College Savings Account

Mutual funds are a great option to save for college for yourself or your children. With this type of fund, you do not want to engage in too much risk, because there is too much at stake if you lose the money. As a result, a diversified, moderately aggressive fund will be a great option. It will generally grow at a faster pace than a money market account or a CD, but you will be protected from exposure to extreme risks. Of course, if there is a severe stock market crash, you can still lose the money in a mutual fund even if invested conservatively.

Purchase Mutual Funds for Retirement

Mutual funds are a commonplace to store retirement savings. Mutual fund shares can be purchased with your IRA or 401(k) account, providing additional tax benefits to your standard savings. Again, conservative, diversified mutual funds are preferable to having all of your money in one company's stock or even government bonds. You will have a greater spread should a specific change occur in a single security, minimizing your exposure to the change.

Purchase Mutual Funds in an Uncertain Economy

When the economy is strong, many investors will break out of the traditional mutual fund option and purchase a wider array of securities. In an uncertain economy, though, it is common to withdraw from the market and place funds in savings accounts. These accounts will rarely beat the rate of inflation. A mutual fund may be a good choice in an uncertain economy. Of course, the fund can still lose money, but you will have greater protection from speculation, bubbles and crashes if you are in a conservative fund than if you are also participating in the speculation. There is research to support the idea an investor will behave more reasonably in sight of an uncertain economy if he or she uses a mutual fund manager's advice.

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