Choosing a mutual fund can be a difficult task. It is the perfect investment instrument if you want to diversify your investments, but you need to be aware about the differences in investment strategy before you make your choice. There are thousands of mutual funds on the market and you likely want to buy the one which can benefit your investment portfolio the most.
There is never a security your mutual fund will reach your goals but it is important you don’t take more risk than you can afford. You can go wrong if you check statistics and buy the one with the highest returns. These funds are likely funds with a high risk profile and there is no guarantee you will make profit in the future; it is even possible you make terrible losses.
Here are some tips which may help you to choose mutual funds:
*Determine your risk profile
Your age and your income are important factors to determine your risk profile. Equity funds will likely reach the highest return on the long run but the risk of losing money is also much higher than investing in bond funds, money market funds or other mutual funds with a low risk profile. Your age is an important issue because you often can take more risk if your age is 15 years or even more from the age of retirement than you will reach this age within a few years. People with a higher income can afford to take more risk than these which struggle every month to pay their bills.
*Determine your investment strategy
Your risk profile and the time horizon are the main factors to determine your investment strategy. A defensive investor will invest 25% in bonds and 75% in shares, a balanced investor 50% in bonds and 50% in shares, an aggressive investor 25% in bonds and 75% in shares and a very aggressive investor will invest 100% in shares. If you only one to buy one mutual fund, you can best buy a strategy mutual fund according your investment profile. If you are an investor who want to buy more than one mutual fund you need to check your invested money in mutual funds fits your investment profile.
*Types of mutual funds
There are several types of mutual funds (for example equity funds, bond funds, strategy funds, guaranteed capital funds, money market funds etc.) and you can diversify between the different types of mutual funds to reach the right mix according your investment strategy. There is plenty of choice to diversify between the same type of mutual funds. For example, if you want to diversify in equity funds you can choose between sector funds, index funds, emerging markets, index funds, funds which invest in a certain country, a continent, worldwide etc. You need always to check that your investment in a certain group of mutual funds fits your risk profile.
*Check performance of the mutual fund
You only have statistics from the past and you best rely on these to choose your mutual fund. There is either no guarantee these mutual funds will reach the same performances in the future but it is still a good indicator if you compare statistics of different time horizons.
*Check the fund manager
It is important to check the references of the fund manager before you decide buying mutual funds. He/she is the one who buys and sells bonds, stocks or other assets in the mutual fund you consider to buy. You can always check his background and performances of the past in fund management by the Security Exchange Commission. It is also wise to check if the fund manager of these you consider to buy is still the same. The performances of the past may not be relevant if the fund switched recently from fund manager.
The fees and taxes
The fees and taxes are not the same for every mutual fund. There are different kinds of fees, for example purchase fees, load fees, administration fees and even management fees. The purchase fees are often 2% and it is possible you don’t have to pay these again if you switch within the same type of mutual fund. Taxes are also important; you have to pay taxes if you buy mutual funds which distribute their dividends.
Choosing mutual funds is not an easy job and you can go wrong if you choose mutual funds which don’t reach your goals. Revision is certainly necessary and you can interact when some of them don’t reach your objectives. You certainly have to check that your invested capital in mutual funds will match your investment strategy, and sometimes you need to sell and buy to reach back to the right mix.