Investing Advice on How to Choose a Mutual Fund

Written by , April 5, 2012

Investing Advice on How to Choose a Mutual FundMutual funds have long been a popular option for many investors, whether an investor is looking to invest many thousands of dollars at a time, or just a few hundred. Mutual funds are managed investment pools that can invest in publically traded companies, corporate or treasury bonds, real estate interests or just about any other type of investment vehicle.

The mutual fund structure allows an individual investor to diversify his or her investment risk and to follow a particular investment focus by making a single investment in the fund. But with literally thousands of different mutual funds available, what should you look for when deciding on the right one for you?

Here is some investing advice on some of the factors you should consider to help you choose a mutual fund.

  • Mutual Fund Focus. Make sure that the mutual fund you invest in has a focus or mandate which matches the type of investment strategy you’re looking for. For example, if you have a positive outlook on large U.S. companies, then look for a mutual fund that invests in those types of companies.
  • Go Beyond the Name. When you’re considering different funds, make sure you do enough due diligence so that you know precisely what you’re getting. Don’t make assumptions as to what a given mutual fund invests in simply based on the fund’s name. Many “Global” mutual funds sometimes have 90% or more of their assets invested in U.S. companies, for example, so if you’re looking for non-U.S. international exposure you’ll have to go elsewhere. Take a close look at the fund’s investment objectives and philosophy, as well as what their 10 largest holdings are, before you invest.
  • Experienced Management. Unless a mutual fund seeks to passively track an index like the Dow or the S&P 500, it will require management expertise and decision-making. While it’s important to understand that a fund which has performed well in the past won’t necessarily duplicate its performance in the future, you should consider how the fund’s managers have handled success and adversity throughout the years.
  • Look Closely at Fees. Every mutual fund is going to charge fees for their management service, but you must be sure that you aren’t overpaying. Depending on whether you use a broker or not, you might be able to invest in many mutual funds without having to pay the sales charges that you might otherwise be subject to. Also pay close attention to how much you’re being charged each year (usually expressed as a percentage of the amount you’ve invested). You should expect to pay very little for funds that don’t require any significant judgment or expertise (such as market index funds), but significantly more for funds that focus on investments in opaque or complex international markets.
  • The mutual fund structure is very powerful and offers investors an opportunity to participate in investments that they wouldn’t otherwise be able to. But like any other investment there are risks, so it’s important to make sure that any investment you’re considering is a good fit for your needs and investor profile.

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