Diversification is the key to making safer investments, an important move for beginners. Here are five of the best funds for newbie investors to get started with on fairly safe footing while building a diversified portfolio.
The two best types of funds for beginners who want to jump into investing at a low cost are exchange-traded funds (EFTs) and mutual funds.
An exchange traded fund (ETF) can contain various types of investments, including bonds, commodities, stocks, as well as a mixture of other investment types. As marketable security, it has an associated price, allowing it to be easily bought and sold.
According to Investpedia: “An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can.”
The most prominent example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index.
In a mutual fund, money is pooled together from many investors into a combined collection of holdings, known as its portfolio. The money (fund) is then invested in securities such as bonds, stocks, and short-term debt.
According to Investor.gov: “Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.”
Mutual funds are operated by professional money managers, who make the investments and an attempt to produce capital gains or income for investors, according to Investopedia. A prospectus outlines the investment objectives, and the portfolio of the mutual form is structured and maintained accordingly.
According to the experts from US News & World Report, the following are considered good picks for beginning investors. They advise choosing from one to three in different market areas (you don’t need to own them all) as a way of building your portfolio.
The fund provides a 3% dividend yield with a low cost of 4 basis points (0.04%), and the cost is considered almost nothing to hold as an investment. US News ranked it the 8th best large value fund.
Two-thirds of the portfolio is invested in high-quality government treasuries and agency mortgage-backed securities. It has a very low expense ratio of 0.035%. U.S. News ranks BND the eighth-best intermediate core bond fund.
The fund provides a 2.1% dividend per year and a low expense ratio at 18 basis points (0.18%), according to US News.
The fund is among the most popular for investors looking for broad-market exposure from a single fund. It provides exposure to US stocks of all sizes. It has a very low expense ratio of 0.03%. The fund has not distributed any capital gains since its inception in 2001, making it quite tax-efficient, US News reports.
The fund has significantly outperformed the S&P 500 in the last six months, according to a report by US News, which rated it the sixth-best small value fund. It has a low expense ratio of 0.15%, it’s inexpensive and easy to get into and out of.