How to Create a Low-Cost Mutual Fund Portfolio
- 1). Add up all the money you have to invest, then divide those funds into money you expect to need within five years, and money you can afford to leave invested for five years or longer. The short-term money should be invested in a money market mutual fund, or a mutual fund containing government bonds. This will keep the money safe and avoid the prospect of losing money just as you need the funds. You can also choose to invest that short-term money in a CD or savings account.
- 2). Contact several low-cost mutual fund companies and ask for prospectuses on their index funds. Vanguard, TIAA-CREF and Charles Schwab all offer low-cost index funds, as do a number of other mutual fund companies.
- 3). Read the prospectus carefully, particularly the section concerning the expense ratio associated with the fund. An analysis of mutual fund expenses posted at The Motley Fool website found index funds with expenses as low as 0.18 percent, meaning that the expenses on a $10,000 investment would be just $18. You can use that 0.18 percent figure as your benchmark when comparing mutual fund companies.
- 4). Review the performance of each index fund you are considering. Each fund's prospectus should list its performance relative to its benchmark index, and that performance should match the performance of the index very closely. Avoid funds that have significantly underperformed the market averages.
- 5). Complete the application for the fund that best fits your needs. Be sure to provide all the required information. All fund companies will need your name, address and Social Security number, but some request information about your employment status and income as well. Send the completed application, along with your initial deposit, to the address listed on the form. Be sure to use the correct address, since some fund families use a separate address for overnight mail.
- 6). Contact the mutual fund companies and request prospectuses for any other asset classes you are interested in. You can find mutual funds that invest in foreign markets, including low cost funds that track foreign indexes. You can also find low cost funds that invest in various sectors of the market, although these sector funds are likely to be more volatile than traditional index funds.
- 7). Set up a monthly transfer from your bank account to the mutual funds you have chosen. This dollar cost averaging approach allows you to accumulate more shares of your chosen mutual fund when the market is down, and fewer when it is at all time highs. Jonathan Burton of MarketWatch.com points out that dollar cost averaging also takes the emotional aspect out of the investing equation, which is certainly important in a volatile stock market.