» Strategies for Mutual Fund Investing » How to Pick a Mutual Fund

How to Pick a Mutual Fund

Many investors try to pick mutual funds based solely on the funds' past performance. However the advertised stellar performance is not a guarantee of future success, especially when it comes to relatively new or small funds. When you pick a mutual fund you should also consider other factors such as:

  • age and size of the fund;

    Before considering investing in a particular fund read the prospectus to see since when it has been operating and what its asset size is. Often while funds are still small just a few successful stocks can have a great impact on their performance and lead to excellent short-term performance records. However, as funds grow such great results are more difficult to sustain since a larger number of stocks are owned by the fund and they cannot influence the fund's performance that easily.

  • fund's risks;

    You should be well aware with the risks the fund takes in order to achieve its results. Higher rates of return are usually associated with higher risks, which may be beyond your comfort level or inconsistent with your financial goals. Always take into account your risk tolerance and long-term investment strategies when picking the right mutual fund for you.

  • fund's volatility;

    Typically, higher volatility means higher investment risk. Therefore if you are looking for a shorter-term investment you should avoid funds with a volatile history since you will not have much time to overcome eventual declines in the stock market.

  • fund's fees, sales charges and expenses;

    When you invest in a mutual fund you will be charged various fees and expenses. A low-cost fund may perform worse than a high-cost fund and still generate the same returns for you. Take your time to calculate how the costs of different mutual funds will affect your returns since even small differences in the fees and expenses may lead to large differences in the returns you get.

  • taxes that are due when you receive a distribution;

    Generally, you will owe taxes when you receive a capital gains distribution from a fund. Your tax bill will be affected even if the return has been negative since you invested in the fund so you should preliminarily find out when your fund will make its distributions and assess the right time to invest in it.

  • recent changes in the fund's operations.

    If the fund has recently changed its investment strategy or its investment adviser, its performance may change too. Therefore, always inform yourself about any recent changes in the fund's operations before considering investing in it.

As you can see, many other factors besides the fund's past performance should be taken into account when deciding which mutual fund to pick.

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