How to Select a Mutual Fund

Mutual funds are a popular investment instrument and everyone will search these which will benefit their investment portfolio the most. How you best select a mutual fund is a difficult question because you only know statistics from the past and these doesn’t guarantee success in the future. You can find information in financial magazines, for example, Money 70 and you can check the rates of Morning Star which give you an insight in the world of mutual funds. You need to be careful with the Morning star rates because it’s possible you will take more risk than you can afford and you can’t see if something is changed in the strategy of these mutual funds.

There are no mutual funds which are suitable for every investor and it is important to do your homework before you select a mutual fund. The main factor to have success in selecting a mutual fund is searching through all the mutual funds which matches the objectives of the investor. Determining your risk profile and your future goals are the first things you need to do before you select a mutual fund. Everyone wants to reach the highest return but it is possible you take more risk than you afford if you invest in such mutual funds and it is possible you may lose a lot of money. Mutual funds with the highest returns are often these where you can also make more losses than the average mutual funds. Nobody can predict the future and there is no guarantee you will earn money with one particular mutual fund or even with several mutual funds.

The main advantage of mutual funds is diversification but you can go wrong if you diversify in the wrong sectors or your investment is not conform your investment profile. There are several types of mutual funds and if you select only through mutual funds which invest in stocks; it is possible you take a higher risk than you can afford. Everyone needs money for short-term and long- term goals; selecting the right mutual for you depends on your individual needs and risk tolerance.

Here are some important factors which may help you to select a mutual fund:

1. Determine your risk tolerance

Knowing your risk tolerance is the most important factor when you want to select a mutual to invest. Equity funds will likely reach higher returns on the long run but you can also lose more money. Your age and your expected earnings are important issues if you want to determine your risk tolerance. People who struggle every month to pay all their bills or they reach the age of retirement have a lower risk tolerance than young people or people with a high income.

2. Determine your investment profile

Once you know your risk tolerance, you can easy determine your investment profile. Defensive investors will invest 25% in stocks and 75% in bonds; a balanced investor 50% in bonds and 50% in stocks, an aggressive investor for 75% in stocks and 25% in bonds and a very aggressive investor will invest for 100% in stocks.

Investors who want to invest in mutual finds need to select a mutual fund according to their investment profile. If they invest for the first time in mutual funds or they want to buy only one mutual fund; it is preferable to invest in a strategy fund according to their investment profile. Investors who don’t like to invest in strategy funds can best invest in three to five different mutual funds to diversify.

3. Check the fund manager

It is important to check the fund manager if you select a mutual fund. The fund manager will sell and buy stocks, bonds or other assets in a mutual fund. He will invest according to the strategy of his/her fund. It may help you to check his background and performances in fund management. The Securities Exchange Commission possesses information about every fund manager and it is wise to inform there about all the information about him/her which can be important for you.

4. Check performance of the mutual fund

However, the performance of a mutual in the past doesn’t secure a good investment for the future; it is still a good indicator if you compare the performance over different time horizons. It may be relevant to check the performance over three, five and ten years. These statistics show the impact of different economic situations, for example recession, inflation, deflation, stock market crash and the impact of oil prices.

5. Types of mutual funds

There are different types of mutual funds, for example bond funds, equity funds, strategy funds, guaranteed capital funds, money market funds and some others. If you know your investment profile you know which type is preferable for you. You have plenty of choice between every type of mutual fund. If you want to invest in equity funds; you can invest in sectors, a certain country, worldwide, index funds, emerging markets and some others. It is often a good idea to make a selection between different types of mutual funds

6. The fees of the mutual fund

The fees vary from fund to fund and you can find these in the prospectus of the mutual fund. The purchase fees of most mutual funds are 2% but there are sometimes deductions if you invest for a certain amount in these fund or you switch to another fund of the same group.

Selecting a mutual fund is an important and difficult decision and the consequence of a wrong decision can be that you don’t reach your goals. It is wise to take your time and compare the performances of mutual funds which match your investment profile. Selecting a mutual fund according to your risk tolerance and your investment profile is the key to have success