A mutual fund is a type of investment product where the funds of many investors are pooled into an investment product. The fund then focuses on the use of those assets on investing in a group of assets to reach the fund’s investment goals.
There are many different types of mutual funds available. For some investors, this vast universe of available products may seem overwhelming.
Acording to Investopedia, here are the things you should know to pick the best mutual fund for your investment.
1. Identifying Goals and Risk Tolerance
You must first identify your goals for the investment. Identifying a goal is an essential step in whittling down the universe of more than 8,000 mutual funds available to investors. You should also consider personal risk tolerance.
You can raise some questions such as, “Can I accept such dramatic swings in portfolio value?”, “Is a more conservative investment more suitable?” Risk and return are directly proportional, so you must balance your desire for returns against your ability to tolerate risk.
A prospective mutual fund investor must also consider personal risk tolerance. In addition, a potential investor must decide how long to hold the mutual fund.
2. Style and Fund Type
The primary goal for growth funds is capital appreciation. If you plan to invest to meet a long-term need and can handle a fair amount of risk and volatility, a long-term capital appreciation fund may be a good choice.
Growth and capital appreciation funds generally do not pay any dividends. If you need current income from your portfolio, then an income fund may be a better choice. These funds usually buy bonds and other debt instruments that pay interest regularly.
3. Fees and Loads
Mutual fund companies make money by charging fees to the investor. It is essential to understand the different types of charges associated with an investment before you make a purchase.
Some funds charge a sales fee known as a load. It will either be charged at the time of purchase or upon the sale of the investment. There are two kinds of loads, namely a front-end load and back-end load.
A front-end load fee is paid out of the initial investment when you buy shares in the fund, while a back-end load fee is charged when you sell your shares in the fund.
Front-end loaded shares are identified as Class A shares, while back-end loaded shares are called Class B shares. There is one more type of fee, namely a level-load fee. The level load is an annual charge amount deducted from assets in the fund. Class C shares carry this sort of charge.
No-load funds do not charge a load fee. However, the other charges in a no-load fund, such as the management expense ratio, may be very high.
