Mutual Funds: How to select one
Which type of Mutual Fund to Buy?
Jonah and Edna were nodding. They had a good idea of what a mutual fund was and the charges involved. But, how would they know which one to pick?
- Understand Your Risk Tolerance. Ask yourself how much you are willing to loose to get more money.
- Understand all the costs and calculate how much you will pay for it: Ask your investment advisor for all the costs mentioned above including the Mutual Funds Sales Load and the Front & Back Load. It’s always better to invest where there is No Load. Look also at how often they sell and buy stocks (called Turnover Ratio) because you pay fees every time there is a transaction.
- Research the Portfolio Manager. This is critical! Before you invest in an mutual fund get to know who is responsible for investing your money and what their track record is.
- Match the Philosophy of the Mutual Fund to your own. As yourself if you are a Value investor, someone who sees the value in a not so popular stock and buys it early, a Growth Investor who is comfortable buying the fastest growing company at the moment or a Conservative Investor who only buys established blue-chip companies that give a lot of dividend or some unique combination of it, and try to find a Mutual Fund that matches this philosophy.
- Diversify your assets! Investing in different things will lower your risk. If you put all your eggs in one basket and that basket crashes you are left with no eggs, it’s the same with money and mutual funds! Put your money in different things so that your risks are lowered. Make sure even the investments in your mutual funds are diverse.