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How to Pick a Mutual Fund

Money Manager | Monday, December 13th, 2010

If you’re interested in buying a mutual fund, there are several ways to go about it. In some cases, you can purchase these funds by directly contacting a fund company. In other cases, you’ll need to go through a bank, insurance agent, broker or financial planner to make your purchase. There are also programs that offer a variety of different funds, offered from many different companies, offering a “no transaction fee” method of purchase. Before making a purchase, it’s important to understand the processes that are involved, and what your options are.

Taking the First Step

Just as with many other things in life, the biggest step you’ll take with mutual funds is actually purchasing the first one. Investing is one of those things that can be easy to put off. Although you should take care to make the best possible decision when investing, almost any mutual fund investment would be a better option than making no investments at all. So, don’t put off your purchase just because you feel a bit unsure of yourself.

Investing in Your First Mutual Fund

Low cost and a good level of diversification are two important factors to consider, especially if you are investing in your first mutual fund. Many first-time investors find that they feel most comfortable with an S&P 500 index fund. These funds have low costs and a wide amount of diversification, both of which are good things. Investing in a mutual fund that actually owns other funds is another popular method, especially for first-time investors. These funds consist of a mix of bond funds and stock funds, both foreign and domestic. Based on the number of years you have until your retirement, you simply pick the appropriate fund. Although this can be a very easy method of investing, the ease also translates into a lack of control and options in regards to the funds. However, this is often a good thing for the inexperienced investor. The most important thing is to understand your personal financial goals, so that you are able to find a fund that is a good solution. For example, a short-term goal such as paying for a child’s college education might be a good match for a money market fund, while a long-term goal such as retirement may be better suited to stocks funds. If you are primarily concerned about the costs associated with investing, then an index fund could be a good choice. It’s also important to know your own risk tolerance, so that you can choose between a conservative or riskier approach.

What to Look for in a Mutual Fund

If want to start investing in mutual funds, you can always start small. In many cases, you can invest as little as a hundred dollars just to get started. Look for funds that allow you to minimize loads and commissions, which are basically sales charges. A front-end load is a charge for buying a fund, while a back-end load, redemption fee or deferred sale is a charge for selling the fund. It’s also wise to find a fund that has a low expense ratio, which ideally should be 1% or less on an annual basis. This ratio represents the annual fees charged by the mutual fund, such as the administrative costs, management fees, and distribution fees. A mutual fund with a low turnover rate, ideally less than 50%, is preferred. It’s also a good idea to look for a fund that has produced good returns in the past, as well as one that is being handled by an experienced manager. If you’re not sure which mutual fund is right for you, consult a financial planner or investment advisor. Finally, always make sure you review your mutual fund on a regular basis, to make sure it is still on track to meet your financial goals.

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