Selecting a mutual fund to invest in can be quite a complicated a nerve-wracking process. There are literally hundreds of different funds out there – each of which has a different focus, a different way of investing, and different amounts of risk. Let’s take a look at what you need to know to select a mutual fund.
Before you start the process of choosing the right mutual fund, you must know what mutual funds is. Mutual funds are companies that collect money from different people and collectively buy a group of stocks and/or bonds on behalf of their investors. Even the name “mutual fund” makes it easy to understand that it is not just you, but many people who are investing money. Mutual funds have the advantage of spreading your risk around to multiple companies – if the stock of one company that is owned by the fund crashes, you don’t loose your entire investment.
Here are a few essential tips that will help you select a mutual fund that is right for you.
Your first step is to decide how much money you can afford to invest in mutual funds. The amount of money you invest will determine which funds you can invest in to start out. Most funds have minimum investments to get started. A popular fund company, Vanguard, has a minimum investment of between $2,500 and $3,000 for each fund you want to invest in. This can be lower for IRA accounts. Don’t invest more in mutual funds than you are willing to risk. You can loose money investing in mutual funds, and you don’t ever want to put all of your money in any single investment – even one that is already a little diversified like a mutual fund.
The next thing to decide is the number of mutual funds you want to invest in. If you are going to invest in more than one mutual fund to start out with, you should consider two or more funds that have a different investment focus. Don’t buy in to three funds that are all in the health care industry. Spread your investment around.
Decide how much risk you are willing to take. More risk can lead to greater returns, but you can also loose more. Stock oriented mutual funds are generally going to have more risk than bond funds – but this is not always the case (high yield corporate bonds can be quite risky). Do some basic research about the performance history of the fund? Has it done well compared to other similar funds? Who’s managing it, and does that person have a good track record?
It’s also important to know what sort of stocks and bonds a mutual fund is buying – because that’s really what you are buying when you buy shares in the fund.
Look in to fees and costs. Mutual funds almost always have a manager (even an index fund). This means they have employees that need to be paid. They often advertise – which is another expense. These expenses are ultimately paid by you, the investor. Fees for mutual funds can quickly eat in to profits. Be sure to know how much the managers need (usually as an annual percent of your investment) to run the fund. Take a look at reputable sites like Morningstar.com for a wealth of information about thousands of funds.