TOP DRAWER ARTICLE

Investing in Mutual Funds
by
HL Carpenter

So you’re thinking of investing in a mutual fund. You already know the benefits, which include diversification, professional management, automatic reinvestments and the ability to begin investing with relatively modest initial outlay. But how do you tell which fund is best for you?

Here are four questions to consider.

1. What are my investment goals?

Are you looking for capital appreciation? Current income? A chance to get into emerging markets?

Mutual funds can be classified by these same objectives. They’re spelled out in a disclosure document called a prospectus. Get a free copy for any fund you’re interested in, and choose a fund with an investment objective that matches yours.

2. What is my risk tolerance?

You can’t avoid risk. But knowing how much you can tolerate will help you choose a fund that lets you sleep at night. Make an honest assessment, both of yourself and of the fund.

3. What is the fund’s track record?

The ads touting superior investment performance are enticing, as they’re meant to be. But pay attention to the caution that the past isn’t a predictor of the future.

Look beyond one-year returns to get a more balanced picture over three, five or ten years. Ask non-financial questions, such as how long the fund has been in existence in its present form, and whether management has experience and flexibility.

4. What are the fund’s expenses and management fees?

All mutual funds have costs. Charges can include operating costs, distribution and service fees, a broker’s commission for buying and selling, as well as other administrative expenses.

Check prospectuses to make an apples-to-apples comparison of several similar funds. While cost is only one factor in your decision, keep in mind the impact on your total return.

Originally published June 2007.

Last update: January 8, 2011