Before you can pick a good mutual fund, you have to know what they are. Mutual funds are basically a pool of money that many investors put together. Then the manager(s) of the fund takes all this money and puts it into different investments buying stocks, bonds or other funds on a number of publicly traded companies. The manager(s) decide what they want to buy and sell based on their judgement and research. When you invest in a mutual fund, you end up owning a tiny portion of each share of stock or whatever you've purchased.
Each mutual fund invests in different things, and each fund has different goals. Some various fund goals include: aggressive growth, maximum income (high dividends) or equity preservation (low risk). Income funds also invest in bonds and have lower chances than a growth fund of making a lot of money - but they generate present day income.
Mutual fund companies have various fees and commissions that they charge in exchange for their services. The commissions they charge are called a "load". "No load" funds do not charge sales commissions but do not provide financial advice. All funds though charge management fees and some charge marketing fees as well. It is a good idea to compare these fees as they can vary widely from company to company.
Some basic fund information -
1. There are managed mutual funds and index funds. Managed funds are run by a manager who decides what he or she is going to buy and sell with the money in the fund. When you buy a managed fund, it is important to not only keep track of your fund but also of the manager who's responsible for the fund. Check to see how long they have been in charge. Are they the one responsible for the fund's terrific track record or is someone else in charge now? The managers ultimately create a fund's track record so they are the one you want to follow.
2. Index funds are the other type of funds available for purchase. These are great when you don't know which mutual fund to buy and don't want to learn about the funds or their managers.
There are several indexes that track the values in the stock market and when the stocks go up in an index, so does the index's average. The Dow Jones average is based on 30 stocks. The Standard & Poor's index(S&P 500) is based on 500 stocks. These are two most widely quoted indexes. Mutual funds constantly compare their performance to the various indexes. Many of them outperform the index funds and many underperform them also. When you buy an index fund, it simply buys all the stock in the index you are interested in.
3. All major financial and personal finance magazines publish mutual fund performance ratings. Some safety guidelines when looking at funds are that they have done well over an extended period of time - at least five years and haven't recently changed managers.
4. Don't be swayed into thinking that funds that charge high fees perform better than those who don't. If you pick a good low-cost fund, this allows a larger percentage of your investment dollar to work for you.
How to improve your odds when picking a mutual fund!
Since you can buy mutual funds that invest in almost anything you want, it is important to first decide on your goals. Are you looking for aggressive growth and willing to take risks or are you close to retirement and need to minimize risk?
If you have a 401(k) or 403(b) retirement plan at work, it will allow you to pick funds from a small group of mutual funds. Since most of your work is done in this situation, all you have to do is identify your goals and then pick the funds that best reflect your goals.
Be sure and review how well the funds have done over the past five or more years. This information can be obtained from your retirement plan administrator or financial magazines such as Business Week, Forbes, Morningstar and Money.
If you are looking at investing on your own, your choices will be obviously much greater. How will you go about choosing?
First, stick with top quality funds with the lowest possible fees. You are usually better off investing in funds with no up- front sales commissions (loads), no marketing fees and very low management fees because the fees that are taken out won't be available to compound to earn you more future earnings. All mutual funds publish what is called a prospectus, which lists all fees associated with that fund.
A second tip is to favor funds whose investment strategy is moderately conservative, which means that most of the money for that fund is invested in established and successful companies. This way you are more likely to show slow but steady growth.
You can research mutual funds and start investing with no minimums at ShareBuilder.com
Doris Dobkins is the Money Saving Expert Author of "Financial Freedom A-Z Home Study Course" and publisher of the free weekly ezine $mart Money New$. www.creativefinances.com
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