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A mutual fund typically contains a variety of stocks, bonds and money market instruments that are all contained within the one fund. When you invest in a mutual fund, your money is tied-in with the money from other investors and used by the fund manager to purchase additional securities for the fund. This is often a great way for an investor to have a diverse portfolio without having to buy their own individual stocks and bonds. Here are some tips for evaluating mutual funds that can help you decide which fund is the right one for you.
Types of Mutual Funds
There are many different types of mutual funds that you can invest in. Mutual funds may own stock in small companies or big businesses. The fund may follow the performance of the Standard and Poor’s 500, NASDAQ or even the Dow Jones Industrial Average. Some funds may be comprised of nothing but short-term bonds, or the fund may be slow-growth and heavy on CDs and money market accounts. When deciding on which mutual fund to invest in, remember that it is important to compare funds that are similar in their holdings and objectives.
Research the Mutual Fund
What types of stocks, bonds, or other securities does the mutual fund hold? Does the fund always invest the same way or does the fund manager like to take risks? Note what the fund’s investment strategy is and how well it performs in both good economic times and bad. Check into the history of the fund manager. This can be done either online through an Internet search engine or by requesting a prospectus from the company that owns the fund. The prospectus normally gives a bio of the fund manager’s track record and explains the manager’s investing philosophy.
Size of the Fund
Note whether the mutual fund seems to be growing or if the number of holdings in the account is shrinking. Holdings in a healthy fund typically grow and multiply. If the amount of the holdings appears to actually be getting smaller or the fund is shrinking in size, this could indicate that the fund manager is selling off the liquid assets of the fund. This can mean that the fund is in trouble or that the fund manager is about to restructure the fund. In either case, further research should be done before an investment in the mutual fund is made.
Note the Mutual Fund’s Expenses
All mutual funds incur fees when stocks and bonds are traded. There are also expenses for salaries and overhead costs. This is called the “expense ratio”. A lower expense ratio is considered a good thing because this generally means that more money is actually going into your pocket instead of being used to manage the fund.
Load versus No-Load
It used to be that if you bought or sold a mutual fund or any type of stock, you had to do it through a stockbroker. Since the stockbroker was actually initiating the sale or trade of the stock for you, he was paid a commission, which was a percentage of the amount that was bought or sold. If a commission is paid on a mutual fund, it is called a “load fund”.
The amount that is charged can vary and is typically between 4 to 8-percent of the investment amount or can even be a flat fee. A mutual fund that has shares that can be bought and sold without a commission, however, is called a “no-load” fund. While both types of fund work the same way, most financial advisers suggest avoiding load funds since the amount of return is the same.