Understanding Mutual Funds – Buy Lower
Posted on: April 28, 2017, by : fadmin
When you invest in a mutual fund, you or your advisor picks one generally based on a good track record and/or with the idea that the holdings are ones that are thought to have potential.
When I pick a mutual fund I look at the track record, and then keep looking to find one that is currently has a share price that is down 10-20 percent from it’s 52 week high. I think about what makes up the fund and think about why it’s down and what is the potential for it to come back up at some point. I generally go for an index fund because of the lower costs.
Once I decide on a fund I don’t buy it.
Well, I do buy it but most people decide to put their money in a fund and don’t think about what happens next. And if the fund is down quite a bit then you may not have to care.
But if your fund is NOT down a lot, you could be paying more for it than you have to. Mutual funds are made up of stocks and no one like to buy stocks as their are going up. Sure sometimes you do to ride that filly, but in general you want to buy low and sell high.
So what I do is keep an eye on the stock market. Depending on what the mutual fund tracks, you can watch the same market and see which way things are going because that will generally related to the fund share price.
Now stocks are going up and down all the time during trading hours and to a smaller extent after hours. And during the time the markets are open you can buy and sell at will. You can do the same with mutual funds, well except you can’t. You can place an ORDER to buy shares of a fund, but that fund won’t get executed until after 4 PM ET. Yep, once a day after market close.
So if you decide to invest in a fund in the morning, what you actually pay will be more or less than what the market indicated when you made that decision. Unless you wait until near the end of the trading day.
If the market doesn’t make any big moves like hundreds of points then it may not affect your cost much unless you are working with large dollar amounts. But if you can delay your investment a few days it could save you some money if the market takes a dip. And the reverse is true when it comes time to sell.
One last thing: Most people set their mutual fund to reinvest any dividends. You can do that. It’s nice to see your investment grow faster rather than slower.
But if your fund is growing you may also be paying more per share as time goes on. So while you got the dividend or capital gains, you are using it to buy a more costly investment. Taking it as cash and then investing that cash in something else that has more potential to grow may be a better option. And you also will be “locking in” that profit if the fund that paid the dividend should decline at some point. If you want to invest in the same fund. Let the dividends go into your cash account. Then when the fund share price takes a dip, throw it back in.

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