How to Choose a Mutual Fund
You must know what you are looking for. For most investors, choosing a mutual fund is like hitting a mall without a what-to-buy list and end-up buying things based on the neighbour advice or a few advertisements. This does not work with investing. Just because it worked out well for your neighbour last year, does not mean it is going to do for you too, this year. To choose the right mutual fund for your portfolio, you must learn to shrewdly balance cost, risk and performance. Here is how
Analyze Yourself: To start with, take a candid judgment on your financial goals and risk tolerance. This will ease you to develop the right investment strategy. Are you willing to consider a fund that invests profoundly in stocks? The wavering stock market can greatly risk your prospective returns.
Be Familiar with Fund Styles: To choose right, you should get familiar with the idea of âEUR" fund styles. Knowledge about these fund styles helps you to include a blend of styles and make a good strategy based on diversification, which helps reduce risk. But it is important to keep in mind - diversification does not guarantee any profit or loss protection.
Look for Disciplined Fund Companies: The most important thing to always keep in mind while opting for a mutual fund âEUR" past performance is not necessarily indicative of the future returns. Go for relative study of the fund listings to recognize the most disciplined performers over the past 5, 10, 15 or 20 years while evaluating the right choice of mutual funds.
Check the Cost of Funds: The annual fees charged by the funds are represented by the expense ratio. It includes management fees, administrative costs, 12b-1 distribution cost, advisory costs etc. You should choose mutual funds with a substantially low expense ratio.
Track Record of the Fund Manager: The investment success may dramatically depend on the fundâEUR(TM)s management. Experts who select and monitor the fund should be evaluated on the basis of experience in managing a fund over a full market cycle, consistency in providing fine returns and strong discipline with sticking to an investment approach for longer terms.
Turnover: The annual turnover signifies how long a mutual fund holds on to a stock it purchases. The basic rule is âEUR" the longer it holds, the lesser the trading and lower the turnover. A 100% turnover implies all the fundâEUR(TM)s holdings have changed every year. Preferably, turnover should be less than 80% of mutual fund average.
Unjustifiable Load on the Fund: Some mutual funds charge sales load which is compensated to the broker and does not acquire any benefit to the investors. Load funds charge sales commissions which may fluctuate from 1% - 8%. It can be treated as a negative return on the asset with no extraordinary privileges for the investor.
Analyze Yourself: To start with, take a candid judgment on your financial goals and risk tolerance. This will ease you to develop the right investment strategy. Are you willing to consider a fund that invests profoundly in stocks? The wavering stock market can greatly risk your prospective returns.
Be Familiar with Fund Styles: To choose right, you should get familiar with the idea of âEUR" fund styles. Knowledge about these fund styles helps you to include a blend of styles and make a good strategy based on diversification, which helps reduce risk. But it is important to keep in mind - diversification does not guarantee any profit or loss protection.
Look for Disciplined Fund Companies: The most important thing to always keep in mind while opting for a mutual fund âEUR" past performance is not necessarily indicative of the future returns. Go for relative study of the fund listings to recognize the most disciplined performers over the past 5, 10, 15 or 20 years while evaluating the right choice of mutual funds.
Check the Cost of Funds: The annual fees charged by the funds are represented by the expense ratio. It includes management fees, administrative costs, 12b-1 distribution cost, advisory costs etc. You should choose mutual funds with a substantially low expense ratio.
Track Record of the Fund Manager: The investment success may dramatically depend on the fundâEUR(TM)s management. Experts who select and monitor the fund should be evaluated on the basis of experience in managing a fund over a full market cycle, consistency in providing fine returns and strong discipline with sticking to an investment approach for longer terms.
Turnover: The annual turnover signifies how long a mutual fund holds on to a stock it purchases. The basic rule is âEUR" the longer it holds, the lesser the trading and lower the turnover. A 100% turnover implies all the fundâEUR(TM)s holdings have changed every year. Preferably, turnover should be less than 80% of mutual fund average.
Unjustifiable Load on the Fund: Some mutual funds charge sales load which is compensated to the broker and does not acquire any benefit to the investors. Load funds charge sales commissions which may fluctuate from 1% - 8%. It can be treated as a negative return on the asset with no extraordinary privileges for the investor.
Source...