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How to Choose Mutual Funds

Updated on August 25, 2013

A mutual fund is an investment option in which you hire a team or individual to manage your assets in place of doing it yourself. Mutual funds are made up of a pool of funds collected from many investors which gives them access to professionally managed, diversified portfolios such as stocks, bonds, commodities, or an index mutual fund which covers a specific area of the market. The following steps will show how to compare mutual funds and explain the process of mutual fund investing.

Set Your Goals

After you determine your goals and risk tolerance, you can then select the funds that are best for you. For capital appreciation, you should lean toward funds that invest in equities or stocks, both foreign and domestic. You can also compare mutual funds that invest in commodities such as gold or oil. For more conservative investments, you can look at bond funds which provide a steady stream of income, but with a lesser return.

Track Record

In choosing a fund, you should first look at the mutual fund's performance or track record. What has been the performance in both good and bad years? Keep in mind, past performance is not indicative of future results, but a consistent track record is key to mutual fund investing. Check the tenure of the managers of the fund, making sure they have been managing the fund for a while. Be wary if the manager has just started running the fund since there will not be a track record. Make sure the fund's holdings are consistent with the objective of the fund. For example, if the fund is a large blue chip fund, be wary if their holdings are of smaller, less recognizable companies not consistent with the objectives of the fund.

No Load and Load Funds

Learn the difference between No Load and Load Funds. No Load funds are generally less expensive and have no commission attached. This type of fund is suitable for the do it yourself investor.. Since you're doing your own mutual fund research, and not using an advisor or broker, they are cheaper. No Load Funds are usually purchased through the mutual fund itself. A Load Fund can either have a commission to buy or sell, or higher management fees that are charged to you on an annual basis. Load Funds are usually purchased through a broker or financial advisor, but can also be purchased directly through the fund. The mutual fund's returns are determined by the portfolio manager's ability and performance. One fund is not necessarily better than the other.


Choose Your Option

After you compare mutual funds and are ready to invest, there are three ways to go. You can select a financial advisor and open an account with his/her investment firm, or if you prefer to go it alone, you can invest online. You can establish an account with an online brokerage firm such as Etrade, TD Waterhouse, etc. Or you can invest directly with a mutual fund company such as Vanguard, Fidelity, American Funds, etc. by going directly to their website.

Pros and Cons

Remember, just as there are advantages, there are also disadvantages to mutual fund investing, whether you are doing it through a broker or investing online yourself as in No Load Funds. As with any decision, educating yourself and becoming familiar with a number of available options is the best way to proceed. Always measure the risk to reward factor.

Conclusion

This article is meant only as a basic guide to choosing a mutual fund. To learn more, you can consult with a financial advisor who can guide you through the intricate aspects of mutual fund investing and investing online, or you can do your own homework by going to the many investing online tutorials available.

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