Mutual Funds 101: How to Choose the Best Mutual Fund

Mutual Funds 101: How to Choose the Best Mutual Fund
16 Feb 2019

Solid investment strategies call for financial thinking outside the box. Smart investors take risks beyond their usual objectives to secure future capital.

Finding a low-cost mutual fund that brings in a good return is a clever way to stack your portfolio.

90 million people in the US invest in mutual funds, proving the ease of buying into this type of investment. An analysis of historical performance, ratios, and management simplifies the process.

That keeps investment choices straightforward when you’re ready to choose.

Want to invest in mutual funds, but aren’t sure which one to select? Continue reading. Learn here how to choose the best mutual fund.

1. Set a Strategy to Identify Goals and Risk Tolerance

Last recorded in 2017, the United States has 9,356 mutual funds for investors to choose from. Different fund management groups and companies offer a plethora of options.

So how do you determine what’s best for you to invest in? Narrow your options down in terms of goals and risk tolerance.

Present income or long-term gain?

Is this investment to satisfy a current financial need like a mortgage or college tuition? Sometimes people pay into mutual funds to serve an ongoing monetary situation.

In general, these needs require more than what they have on hand in savings. They’re more short-term necessities like education and small period loans.

Another need for a mutual fund is to secure the future. People like to accumulate gains for retirement.

Can you tolerate continuous risk?

No portfolio is the same. Some investors have riskier objectives, while others remain more conservative with their strategy.

You have to decide if you can tolerate a portfolio with drastic up and downs. Can you manage the stress of the highs and low within your investments? If not, your tolerance level may need to level out within a conservative game plan.

2. Study the Performance of the Best Mutual Fund

Grasping fund performance can be like figuring a Rubik’s cube. It’s tricky. The ultimate goal is to heavily consider past performance. But that’s not always a guarantee.

In the same vane, current performance measures isn’t a strong indication of how a fund will behave in the future. Top-performing funds don’t hold the top spot long. And poor producing funds improve over time.

Use the Morningstar Rating to measure and help narrow down your fund choices. This rating helps measure a mutual fund’s risk-adjusted return. After three years of performance, a fund gets a rating from one to five stars.

Morningstar takes into consideration sales charges and expenses as well as loads and fees. It also examines a fund’s risk-adjusted performance for 3, 5, and 10-year periods.

A higher rated fund suggests consistent performance. Take your time and weigh the stats.

3. Consider Costs

Costs are a determining factor when selecting the right mutual fund. Take a close look at the transaction fee of each fund you’re considering.

Transaction fees (sales loads) can cost up to 5% upfront, affecting your initial investment. That means if you invest $50,000 in a fund, your account balance will start at $47,500.

Depending on your percentage of return, you could suffer capital lost and end up with less money in the end. Consider no-load funds your first time out of the gate.

Also, examine the expense ratio of different funds. This is the ongoing, long-term cost of a fund which helps predict the funds future performance. Invest in a fund with the lowest possible expense ratio.

The larger the expense ratio, the bigger the hurdle your money has to jump before you see any of it.

Buy a Mutal Fund

There are reasonable resources available to help you choose the best mutual fund. This criteria is not the end-all but should assist you in narrowing down your selection.

Investing is a financial sport full of risks. Put together a portfolio that you can manage and enjoy.

Look deeper into our resources for more insight into investment management and alternatives.

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