The concept of the mutual fund was born from the simple act of pooling money together. Since its inception in the 1920s, it has grown to become a multi-trillion dollar industry.
Today, small investors can make use of mutual funds to multiply their wealth, by making methodical investments based on a dollar cost averaging plan.
There are some mutual funds that charge a fee, referred to as a sales load. The fee is in most cases approximately 5% of an investor’s assets and it is paid to the person who sells the fund to the investor. Alternatively, there are mutual funds that don’t involve the sales load fee and the cost different clearly indicates which funds as the best option for an investor; it is always best to purchase no-load mutual funds. That said, it is definitely worth understanding mutual funds and how to invest them. Here are some items a potential mutual fund investor should look for:
1Find Out What The Expenses Ratio Is Of The Mutual Fund
Running a mutual fund costs money – the expenses involved, in addition to investing your money, also include pretty much everything that a conventional office requires to run its operations smoothly. The sum of these costs is referred to as the expense ratio. This means it is the cost of owning the mutual fund. As an investor you will want your funds to have the least possible expense ratio because the lower this figure is, the faster you will start earning money.
2Avoid High Turnover Rates
For mutual fund investors, it shouldn’t just be about getting the highest returns, but rather the highest returns after taxes. There is actually more money to be made from a fund which offers 10% growth and no turnover than from one which generates 15% growth and a turnover of 100%+. All of this has to do with taxes. Of course, this does not apply for tax free accounts e.g. the Traditional IRA, Roth IRA or the 401k, or for investments that are not profit oriented. For any other type of mutual fund, it is important to consider the turnover rate. This is the portfolio percentage that is purchased and traded each year. Avoid funds whose portfolio turnovers are 50% or more – they are the tell-tale signs of investment managers who aren’t too sure about their investment plans.
3The Mutual Fund Management Team Should Be Experienced and Professional
Before going any further with any portfolio manager you should carry out a thorough background check on him or her to establish what track record he/she has. You may be surprised to learn that your manager has a skimpy track record or even a history of losses in a stock market whose overall performance was healthy. If this is the case you shouldn’t waste time with them – start finding a better portfolio manager right away.
The best management team to have can be found in a firm whose founding member(s) are adept portfolio managers or investment analysts, and who have created a team of talented professionals around them, thus guaranteeing a smooth transition. It is this structure that has seen the top investment firms remain successful decade after decade.
Another detail that you must insist on knowing is whether the managers have invested substantial portions of their net worth together with you as the fund holders. If this is true then you can be more confident of the managers’ commitment to ensure positive fund performance.
4Choose A Mutual Fund That Matches Your Philosophy
When it comes to choosing a mutual fund you will ideally want one which agrees with your own approaches to money management. There are different philosophies that appeal to different people. Whatever style appeals to you, whether it is value investing, growth investing, or even the preference to only own blue chip companies, you will certainly be more comfortable if you and your portfolio manager’s money management principles are in unison.
5Diversity Your Assets
6Index Funds
Starting a dollar cost averaging plan into low-cost index funds absolutely guarantees that in the long term you will outdo the performance of many managed mutual funds. Index funds can be very good for average investors who want to make long term investments and regularly set aside monies that will increase via compounding. Index funds combine very well with well spread out diversification, low turnover rates and low expense ratios.
7International Funds
If you are thinking about owning a fund in the international equity market, your best bet is to invest in solid markets in countries such as Japan, Germany, Brazil, Great Britain etc. Emerging markets are alternatives that can be considered but the economic and political risks posed are much more substantial.
The fact that most international funds are characteristically unhedged means that your stocks will be exposed to currency market fluctuations. A necessary precaution will be to go for mutual funds with hedged exposures and with reasonable expense ratios.
8Compare Your Mutual Funds Against a Relevant Benchmark
Mutual funds are different in terms of approaches and goals. To establish whether or not your portfolio manager is performing as at an acceptable level, there are different benchmarks that can serve as your basis for comparison. Among these are the S&P 500, the Solomon Brothers World Bond Index, Dow Jones Industrial Average, the Russell 2000, the Nasdaq Composite, and the Wilshire 5000 etc. An easy way of finding out what benchmark is relevant to your mutual fund is to sign for a premium subscription with Morningstar.com whereby you will get information on various funds including research reports, historical data, and even details about various portfolio management teams.
9Dollar Cost Averaging
The principle of dollar cost averaging is the best way to help lower your risks over the long term as well as to keep your investments’ overall cost basis as low as possible. It is a good idea for all mutual fund investors to find out as much as they can about this principle.
