Deciding to purchase a mutual fund is the first step toward your financial goals. Deciding which mutual fund to purchase is a bit more difficult.
What is a mutual fund? Basically, mutual funds are a way individuals can afford to buy various stocks, bonds, and individual securities, with one mutual fund purchase. You give professional investors your money, they invest for you.
There are thousands of mutual funds, where do we start? Today’s mutual funds have different categories for every possible investment goal. Because there are so many funds, all you do is decide what you want. First ask yourself, why are you investing. Different people invest for different reasons. Some invest for income, their children’s college, or for retirement. Whatever your individual reasons are, give yourself a time frame, to achieve these goals. If your time frame is 7 years or under, you might choose a more conservative fund with less risk. If you have 10 years or more, a high risk, more aggressive fund is probably for you.
Assessing what your willing to risk is also important. Some people aren’t comfortable with a volatile market. If watching your money fluctuate at times causes you to panic, try a more conservative fund. If volatility doesn’t stress you out, you might want to go aggressive. Ther’s no wrong or right way, it’s what you’re comfortable with. Keep in mind, if you want a 30% return, you must be able to afford a 30% loss. Young investors tend to be more high risk. People near retirement tend to be more conservative.
Generally, there are two investment types: Equity and income. Equity means ownership through stocks, which is usually high risk. Income produces current income through bonds, which are less risk. Investors willing to mix stocks, bonds, and even money market securities, have a better chance of getting higher returns over time. Combining the growth potential of stocks, with the income of bonds, and the stability of money markets, ia a good way to start investing.
Another way to judge a fund is the performance. Historical performance is an excellant way to judge how the fund has done. But remember, the past doesn’t guarantee the future, it tells how a fund will react during a particular market condition. Don’t look at last month’s top performers, look at the last 3-5 years. Performance consistency and your individual goals are the key when choosing a mutual fund.
Investors also avoid increased cost that can take away from there overall returns. Mutual funds with high turnover rates should be avoided. You’re charged when your fund buys and sells stocks (turnover). Compare funds, opt for their low turnover fund. Annual expense ratios range from .2% for index funds to 2% for specialty funds. Most funds charge about 1.5%. Shop around, compare prices. Go for the lower expense funds, this is all coming from your returns.
Some mutual funds have a “load fee”. “Load” is the fee the mutual fund charges you , to pay the broker who sold the fund to you. Their charging you to pay his salary. Go “no load”. There are too many “no load” mutual funds out there.
There are also front-end and back-end loads. You pay a front-end load when buying a fund. A back-end load is charged if a fund is sold within a specific period of time. The fee typically declines to zero by the seventh year. Shop around and compare.
There are several independent mutual fund services. Morningstar and Lipper amp; Co. can assist you in determining risk and investment objectives. Investors can also track their funds online. As with any mutual fund purchase, you must read the funds prospectus before purchase. Good luck.