Key takeaways
- With mutual funds, investors can buy a diversified portfolio without an investment advisor, which makes a well-constructed portfolio more accessible.
- There are thousands of mutual funds to choose from, but not all of them will be a good fit. Consider your investing goals and risk tolerance before buying.
- Mutual funds with strong performance records and experienced fund managers can help maximize long-term portfolio growth and minimize shorter-term risk.
There are thousands of mutual funds on the market at any given moment. So how exactly do you choose? While choosing a mutual fund may seem difficult, it doesn’t have to be.
Mutual funds allow groups of investors to pool their money, and the fund’s manager then selects investments that align with the fund’s investment strategy. As a result, the individual investors who buy shares in the fund are actually investing in those assets selected by the fund manager. Because of this, finding a mutual fund that aligns with your goals is vitally important.
That’s just one of many factors in deciding which mutual funds are right for you.
7 essential tips to pick the best mutual funds
Here are some tips to help you select the best mutual funds for your needs.
1. Consider your investing goals and risk tolerance
There are many, many mutual funds. Just because a mutual fund is popular doesn’t mean it’s the right fund for you. It may be helpful to ask yourself some questions: Do you want your money to grow steadily over time with a low level of risk? Do you want the highest potential returns? Questions like this can help you start to determine which fund is right for you.
Also consider your risk tolerance. For instance, are you willing to tolerate large swings in your portfolio’s value for the chance of greater long-term returns? If you are investing for retirement, it’s typically best to keep your money invested for the long haul.
But if a very aggressive strategy will cause you to get cold feet and sell your investments, it’s best to adjust your strategy to something more suited to your risk tolerance. After all, selling your investments may also result in missing out on returns. Plus, you may realize capital gains and incur tax obligations depending on the type of investment account.
Your time horizon is also important. If you need to access your money in less than five years, an aggressive growth fund is likely not the best strategy. One example of a fund that has the time horizon already built in is a target-date fund, which adjusts its risk level based on how close you are to retirement age.
Often, investors with a long time horizon and a high risk tolerance will generally earn higher returns by investing in all-stock mutual funds because they can afford to take on more risk over time. Those who need some degree of safety, and are nearing retirement for example, will likely want to turn to mutual funds that have more exposure to bonds or other fixed income investments.
2. Know the fund’s management style: Is it active or passive?
Another way that mutual funds can vary is their management style. One of the largest contrasts can be seen when comparing active and passive funds. With actively managed funds, the fund manager buys and sells securities, often with a goal of beating a benchmark index, such as the S&P 500 or Russell 2000. Fund managers dedicate countless hours to researching companies, economic trends, and other factors in order to achieve better performance. However, the tradeoff with actively managed funds is the potentially high fees required to compensate these managers for their time. It is important to assess whether these fees align with your financial situation and goals. Comparing a fund’s past performance to the market can provide valuable perspective, as well as evaluating its volatility and turnover.
Over time, passive funds tend to outperform active funds, particularly when factoring in fees. Understanding the different types of funds available, such as large-cap funds, small-cap funds, value funds, growth funds, and income funds, can help you make informed investment decisions.
High fees can significantly impact investment returns, so it’s crucial to be aware of load fees and expense ratios. Actively managed equity funds typically have an average expense ratio of 0.65 percent, while index funds average around 0.05 percent. Conducting thorough research and evaluating a fund’s past performance, management team, turnover rate, and historical performance are essential steps before investing.
Diversifying your portfolio with various asset classes, such as international funds, bonds, real estate, and fixed income funds, can help mitigate risk and enhance long-term stability. Despite the uncertainty of future results, focusing on long-term growth and maintaining a well-balanced and diversified portfolio can increase the potential for growth over time. The period of the longest downturn in the stock market lasted from around 1966 to 1982. Despite this extended period of decline, the DJIA experienced a significant rebound, steadily increasing for the following 17 years, with some minor fluctuations along the way.
This serves as a reminder of the importance of long-term investing. While there is always a risk of losing money in mutual funds, choosing funds with a strong track record and experienced managers can help mitigate short-term risks and increase the potential for long-term portfolio growth.
If you need expert advice on managing your investments or planning for retirement, Bankrate’s AdvisorMatch can connect you with a certified financial planner (CFP®) to help you reach your financial goals.
When it comes to selecting mutual funds, it’s crucial to consider your individual goals. Researching the fund’s objectives, performance history compared to its benchmark, management team, and fees can help determine if a fund aligns with your portfolio strategy.
For beginner investors, index funds that track popular indexes like the Nasdaq 100 are a good starting point. These funds typically have low fees, allowing investors to retain more of their returns and begin building wealth steadily.
Selling shares of a mutual fund is a straightforward process. Simply place a sell order through your brokerage or the fund company, and the shares will be sold based on the net asset value (NAV) calculated at the end of the trading day.
In conclusion, not every mutual fund will suit every investor’s needs. Take the time to assess your long-term goals, risk tolerance, and investment horizon. Focus on funds with a strong performance history and experienced managers to support your portfolio’s growth over time.
It’s essential for all investors to conduct their own research into investment strategies before making decisions. Past performance is not a guarantee of future results.