We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are market experts and devout many hours of study to the various stocks. Unless you want to devout a large portion of your free time to the study of the financial reports, you probably won’t have as much information to make a decision as a mutual fund manager.
You also shouldn’t forget the well documented advantage of diversification. By holding several non correlated investments, risk is reduced. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk.
Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.
Because of all the advantages, it’s not really surprising that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose from, so how does one make a selection? Try to consider these few tips:
Jumping on the recently performing best fund is what you need to avoid. It may seem like the safe and rational thing to do, but like individual stocks, you want to buy low and sell high, not buy high and pray for more growth.
It’s likely that good funds may not be enough to overcome the force of the overall market. Funds that can exceed the broad market without increasing the risk is what you should be looking for. Risk parameters are what each fund has and they are required to follow it. To understand what these are, you need to read the prospectus closely.
Make sure that the number of funds that you own are limited. Diversifying into many mutual funds will not increase your return by much nor will it reduce your risk unless you are trying to simply achieve the same returns as the broad market.
Funds that become too popular and too big tend to slip in performance. This is due to several reasons.
The type of fund being totally dependent on your investment objectives is one final point you need to keep in mind. Designed for your objectives are certain funds and these can either be for retirement, growth, income, funding the kids college, etc.