Since mutual funds are a popular investment option, many individuals look for ways to integrate them into their portfolio. A mutual fund is essentially a basket and within that basket there are a handful of stocks, bonds, cash or a combination of assets. When someone invests in a mutual fund, they’re buying into both an investment manager and an actual company. However, there are a few important things investors should keep top of mind when looking for a mutual fund that’s a fit for them. Here are a few tips to help investors choose the best mutual fund for their investment needs.
Keep fluctuations in mind
From a risk standpoint, it’s important for investors to keep in mind that there are fluctuations in cash and fluctuations of value. Even in a bond mutual fund, the NAV could fluctuate up and down depending on where interest rates lie. The NAV fluctuation in a bond fund is much lower than what it would be going into an equity fund.
Research past performance
A frequent mistake investors make is when they only look at how the fund performed the previous year. If a fund was up a certain percentage last year, they equate that to how much the fund will be up next year. Generally speaking, that doesn’t happen. The goal is to get into a fund before it makes any big moves. When investors do look at the history of a fund, they should look at it over a 5 to 10 year period instead of what’s performing well at the moment.
Sometimes investors may lean towards what’s currently performing well instead of diversifying into a variety of funds. Diversification allows the investor to decrease the risk associated with one particular stock or sector. While diversification decreases risk, it increases the potential for rewards.
Take a look at any associated fees
Any fees associated with a mutual fund will be included in the performance number. This number will be found on the mutual fund’s website or any other reputable website. If these fees aren’t included in the performance number, that should be a red flag for investors. It’s also important to remember that you get what you pay for. Investors may not get the same type of service from a mutual fund with extremely low fees that they would from one that’s slightly more expensive and is more actively managed.
Alternatively, investors can work with a financial advisor who will ensure they’re not chasing the latest trends and will help stabilize any major downswings that could occur. Financial advisors have years of experience and have tools at their disposal to do all the background work necessary and even interview the funds to provide their clients with tailored investments.