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Tips for Choosing Mutual Funds

coins in clear glass jar with house fund sign

Search for a Good Mutual Fund with Research and Analysis

What information is necessary when choosing mutual funds? Whether investing in commodity funds, index funds, bond funds, or simply equity funds, it is important to be able to adequately evaluate the quality, performance, and risk of each potential investment. Know exactly what makes a good mutual fund.

Research the Mutual Fund Portfolio

Mutual fund research should include three important characteristics of a fund — content, performance, and cost. First, knowing exactly what is in a fund will provide a deeper understanding of the potential growth and risks. Don’t be satisfied with a title, or a brief description; look over the entire list of stocks, bonds, and other possible securities.

Do a personal analysis of each potential mutual fund investment. What is the percentage of large, medium, and small-cap stocks? What sectors are being covered (technology, energy, manufacturing) and what are the typical growth cycles of each? Is the portfolio well balanced? Perhaps most importantly, is it balanced to suit personal investment strategy needs? An already risky investment portfolio may benefit more from a slow and steady money market mutual fund, rather than an equities fund, for example.

Compare Mutual Fund Performance and Costs

Although past performance is not the sole indicator of future performance, it is still an important consideration. Compare mutual funds with relevant indexes, as well as other funds, to gain a clearer view of how strong a potential investment may be. Just because a fund has performed well for the past five years, does not mean it will continue to do so, nor does it mean it cannot have another strong five years.

When choosing mutual funds, it is also important to shop around for reasonable costs. What may be considered a good mutual fund, actually is rather weak, simply because the costs are too high. Returns have to be greater than fees in order to make a profit. In this way, it is possible for mutual funds with average returns, to be more valuable than a pricey fund with great returns. For example, passively managed funds, such as index funds, can be very inexpensive to enter, making it easy to earn steady revenue.

Assessing Risk When Choosing Mutual Funds

How risky is a particular fund? Although diversification is inherent to the nature of mutual funds, ultimately minimizing volatility, a mutual fund is not necessarily a safe investment. Depending on what investments are focused on, a fund could carry either massive risks, or be relatively safe.

To evaluate risk, look first at the content. Commodities are riskier than government bonds; small businesses are more volatile than larger ones. Next, think about who is managing the fund. As mutual fund managers are in charge of making financial decisions, having confidence in their expertise, and their commitment, is important. And finally, use rating systems to help determine how risky a mutual fund is. Ratings should not be the only factor when assessing risk, but they can add insight.

Confidence in a Good Mutual Fund

By conducting research, making comparisons, and evaluating risk, choosing a good mutual fund is not only possible, but inevitable. Take the time to find out what is ideal for a personal investment strategy, rather than merely buying into a fund that someone else has suggested. The time invested will put control, and money, into the hands of the investor.