Things to consider before Investing in Mutual Funds

One of the most common fallacies about investing in mutual funds is that the investor does not need to do any work and just sit back to reap the profits. Well, that is true to a certain extent especially with regards to active management of the funds but it is wrong when it says there is no work to be done by the investor. This is because there is plenty of research and planning  the investor needs to do before selecting and deciding on which mutual fund to buy into.

There are many funds available in the market that make it very confusing for an unprepared investor. When this happens the investor is more likely to choose one that is not in line with the individual’s risk appetite and potential loss. For example, an unprepared and risk-averse investor might choose a fund heavily invested in commodities which makes it a high risk investment. If not careful, the investor could face the prospect of losing the investment instead of reaping the profits.

That is why there a lot of things to consider before investing in a mutual fund. One of the first things to look at in a mutual fund is the asset class of the portfolio. A mutual fund can be made up from different types of investments like equities, commodities, bonds, and so on. The type of assets will determine the risk factor of the fund. For example, a bond fund is typically less risky than an equity but does not promise such high returns. Investors need to choose a fund that fits their risk appetite and also personal portfolio allocation.

Another point to consider is the reputation of the company managing the mutual fund. It is naturally better to get a company with a better brand name and reputation that a fly by the night operator. This is usually evident in the company’s asset under management (AUM) numbers. A high AUM means the company is well trusted by investors to manage large amounts of investments, which also means the reputation of the company is solid. The other way to look at the company’s reputation is by its track record. There are numerous ratings tagged to mutual funds and looking at the records for the company’s funds will tell investors if the company has a habit of making or losing their clients’ investments.

These are but a small number of things to consider before purchasing a mutual fund. It is the responsibility of the investor to fully research these items to ensure they have made the right decision. After all, the decision to purchase a fund lies solely on the shoulders of the investor.