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How to select the best Mutual Fund?

Select the best Mutual Fund

If you are thinking about investing in a mutual fund, you need to be able to choose the one which is right for your individual needs.  There are many considerations to make when selecting a mutual fund.  However, with clear financial objectives, a knowledge of risk and some independent research, you will enhance your success in mutual fund investment.

This article discusses some ways to identify the mutual fund which is best for you.

Consider your goals

financial goal
Target your Goal

There are so many mutual funds available in which to invest.  Considering your financial goals will help you identify a smaller group of fund in the public domain that will help you achieve your specific goals.

Your financial goals could be:

  • Long-term capital gains, such as building your savings for retirement.
  • Provision of current income, such as paying for education fees.

Consider your risks

Risk Taking
Risk Taking

When you invest you have to consider how much risk you are willing to take.  The market can swing dramatically from high to low.  If you cannot bear this type of mental stress, investing in a more conservative fund may be a better idea.

You also have to think about your financial timeline – for how long can you afford to have your money tied to a mutual fund and therefore inaccessible?  Sometimes, mutual funds have large sales charges that can chew up your return over short periods of time.  If you need your assets to be liquid in the near future, then maybe investing in a long term mutual fund is not a good idea.  If you are able to allow your funds to be tied up for five or more years, then a mutual fund is a great investment.

Select a type of fund

Long-Term Capital Appreciation Fund

A long-term capital appreciation fund hold a high amount of their assets in common stocks and are considered more volatile than other funds.  However, they do carry the potential for a larger reward over time.

If you want to use your money in the fund for a long term need, like retirement savings, and you are willing to assume the risk of market volatility, you may be suited to investing in a long-term capital appreciation fund.

Government / Corporate Debt Fund

Government and corporate debts funds are two of the most common holdings in a mutual fund.  If you want to gain some return from your investment in the short term, government and corporate debts funds can help you achieve that.

Balanced fund

A balanced fund invests in both stocks and bonds.  If you have a longer-term investment plan, but you don’t want to assume a high level of risk, a balance fund is a good choice.

Notes on Fund size

Generally, the size of the fund in which you invest does not hinder any ability to meet investment objectives and a good return.  However, be careful when investing in large funds as the larger the fund, the more it will influence the behavior of stocks prices in the market.  It also makes buying and selling stocks with anonymity almost impossible.

Do some research

ResearchingYou should always do some research on the fund’s past performance before investing.  Here are some questions you can ask:

  • Did the fund deliver returns that were consistent with general market returns?
    If returns were drastically lower than general market returns, this is an indication of poor fund performance.
  • Did the fund’s returns vary dramatically throughout the year?
    This can give an indication of how volatile the fund’s products behave on the market.
  • Was there an very high turnover?
    High turnover can result in larger tax liabilities for you.
  • What are the anticipated trends for the future?
    A fund manager can give you some idea of the prospects for the fund’s holdings over the years to come, and may be able to offer insight into general trends in the industry.

When you consider these questions, keep in mind that past performance is not a guarantee of the fund’s future results.

Consider the fees involved

Mutual funds make their money by charging fees to you – the investor. It is important to gain an understanding of the different types of fees that you may face before you make an investment in a mutual fund.

Load fee

The load fee will either be charged when you first make your investment or upon the sale of the investment, to cover administrative costs associated with the fund. You pay a front-end load fee when you initially invest, and you pay a back-end load fee you sell your investment, usually prior to a set time period.

Broker fees

Sometimes, to avoid high administrative fees, the fund may charge fees to pay the broker who manages the fund.

You can avoid load fees by choosing a no-load fund, which as the name suggests, doesn’t charge load fees (front end or back end).  If you choose a no-load fund, always be aware of the administrative fees charged as they may be a lot higher than funds that charge load fees.

Other fees

Other funds charge fees, which are combined in the share price and used by the fund for promotions, sales and other activities related to the distribution of that fund’s shares. These fees are removed from the reported share price at a predetermined point in time, so you may not be aware you are paying the fee at all.

When you are looking at mutual fund sales literature, you should assess the “management expense ratio”.  This can help you clarify any confusion about the sales charges you will pay. The ratio  shows you how much of the fund assets are being used to cover fund expenses, as a total percentage.  The higher the ratio – the lower your return.

The process of investing in a mutual fund may seem daunting, but with clear objectives and diligent research, this investment can return high rewards.

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