Monday, December 31, 2012

How to Choose an Mutual Fund

Funds that belong to the investors collected for investing in bonds, stocks and money are pooled by a mutual fund. They allow investors to diversify their holdings. Money managers operate these funds, and use them for capital investment to create income for the owners. The portfolio structure of mutual funds depends on the initial objectives of an investment.
Investors don’t require individual trades and purchases. Therefore, they are able to add bonds, securities etc. at a much lower price. Here are some tips on choosing the right mutual fund for your nest egg.

1. Select your financial institution
You’ll need to purchase mutual funds through a financial institution. Research and referrals can help you decide which institution to go for. You can also compare savings account rates if you want both savings and mutual funds account. Competitive fee structures are offered by online investment management firms, while banks and credit unions are also an option. Services of financial advisors are also available.

2. Know the risks and goals
The market can shift at any time, and you should know your risk toleration limit before making an investment decision. The goals would depend on whether you’re going for short-term or long-term investment. For your nest egg, long-term investment may be a better option. You can examine the past performance of mutual funds by looking at the statistics such as returns and see the stock index to have an idea. However, past performance doesn’t guarantee future returns.

3. Invest in different types
You can consider investing in both managed funds and index funds. Index funds come with minimum fees as they aren’t managed actively, and perform with the index. Actively managed funds have high fees are they are selected by managers who believe they’ll perform well. Diversification can be achieved by investing in both types. Avoid investing in very large mutual funds as they’re prone to lose responsiveness to market changes.

4. Keep the fees in check
There are three costs related to mutual funds; the fees on purchase, fees as a percentage of the investment and fees of mutual fund managers for the portfolio. The mutual fund turnover fee gets deducted automatically from the net asset value, and investors may not be informed about them. If your financial institution has card offers for mutual fund purchase, the fees can vary, and it’s recommended that you keep an eye on the charges.
Through these tips, you’ll be able to choose a mutual fund that suits your needs.

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