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The number of mutual funds in the country is large, far more than the number of stocks traded on NASDAQ. With a number of mutual fund families sporting great track records, you have many options to choose from. So how do you choose between them?
Buy No-Load Mutual Funds: Mutual funds charge a sales load, which is around 5% of the asset. With capital lost to sales load, your investment on earnings is reduced. So, it’s always best to buy no-load mutual funds, as the sales load can be a significant saving.
Calculate The Expense Ratio: The expense ratio is the percentage of assets that are used to run the mutual fund. These expenses include investment manager fees and administrative expenses. Lower the expense ratio, and increase the returns in your pocket.
Consider Tax Rates: Taxes are an integral part of your earnings. When choosing a fund, you need to consider your return after taxes.
Avoid Funds With High Turnover Ratios. The turnover ratio represents the portfolio that has been bought and sold by the fund. A high turnover ratio can be indicative of bad choice of investments.
Choose Funds Managed By An Experienced Team: Mutual fund investment requires experience and discipline. Investing third party money, you’ll need to strike a balance between caution and expert knowledge on picking the best stocks. Look for funds managed by portfolio managers who have a solid reputation.
Choose A Fund That Matches Your Investment Philosophy: Each investor has different goals. While there are some who fall into the category of value investors, there are many who look for quick growth. There are investors that prefer blue chip companies, while others make their picks based on dividend yields.
It is important to choose a mutual fund that shares your investment philosophy.
Asset Diversification Is Key: Specific industry driven funds aren’t the best idea, especially if you’re a first-time investor. Look for funds that have diversified portfolio. Also, it’s best not to stick to one fund family. Stocks are not the only investment option. Other profitable avenues include real estate funds, fixed income funds, and arbitrage funds.
Verify Against The Appropriate Benchmark: There are many benchmarks, including S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite. Compare what ranking your mutual fund scores against any of these benchmarks.
A disciplined approach is a key to making money. Do not let the short term price events dissuade you. Pick funds that have a solid track record, are managed professionally and deliver performance. You will soon be on the path to building wealth for your future.