Are you planning to add mutual funds to your investment plans but don’t know where and how to start? You’d be surprised to learn how easy the process is – all it takes is some due diligence on your behalf, and you will be ready. Merely understanding your risk tolerance and determining your objectives will get you halfway there. Selecting profitable mutual funds involve picking options that provide excellent returns at incredibly low costs.
When you are ready to choose mutual funds, know that there are many methods to analyze them. One of them involves looking at every fund’s expense ratios, management, team, and performance history. Investors can also entertain various investment strategies to drive their fund choices like buying the market index, international portfolio diversification, or the tried and tested dollar-cost averaging to several funds.
Keep Your Risk Tolerance and Goals in Mind
The mutual funds’ concept came into being when three money managers from Boston pooled their cash in 1924. During the following nine decades, the straightforward yet effective concept grew and became a massive worldwide industry that controlled billions, if not trillions of dollars. It allows small investors to improve their wealth through calculated and systematic investments.
Being an investor, you will have access to more than ten thousand mutual funds from numerous well-recognized fund management companies. Therefore, it would be best to create some goals and narrow your options. Here is a list of question every experienced and inexperienced investor should ask themselves to get some clarity for their investing goals:
- Would a conservative investment strategy be suitable for you?
- Do you want long-term gains or an improvement in the current income?
- Will the money be used for your retirement or college education?
- Are you ready to put up with a portfolio with high ups and downs?
- Would you need to liquidate your funds in a short period?
If you invest in mutual funds with sales charges, there is a high chance they will add up, especially if the investment is short term. It would be best to choose a long-term investing plan of ideally five years to balance these charges.
The Expense Ratio Can Break or Make You
Running a mutual fund requires a considerable sum of money. You must take care of things like electricity, office leases, coffee, analyst salaries, portfolio management, and copies before investing your money. The term used for the asset percentage that goes towards these things (basic operating expenses and management advisory fees) is the “expense ratio.”It is fair to say that it the cost of having the fund.
It would be best to possess funds with the lowest expense ratio possible. For instance, if the expense ratio of two funds is 0.5 and 1.5, the latter will prove to be a massive hurdle, and overcoming it to obtain returns will be complicated. Sure, the difference between the two percentages is quite low, but it makes a massive difference in how your wealth increases.
Steer Clear from High Turnover Rates
It is critical to focus on turnover rates – the portfolio percentages sold and bought each year. The reason behind it is simple: taxes. If someone is investing only through their tax-free accounts like the traditional IRA, Roth IRA, or 401k, this will not be a consideration, and neither will it matter when you manage investments for non-profits. For others, however, taxes tend to take a massive bite out of your returns, particularly if you are lucky enough to occupy your income ladder’s upper rungs.
Look for a Disciplined and Experienced Management Team
It’s no secret that everyone has easy access to various data, so finding your portfolio manager’s information should not be that hard. If the manager holding your mutual fund does not have a good track record, or a history of sizeable losses, especially during stock market conditions were favorable – it would be best to consider another option as soon as possible.
Ideally, a firm founded on multiple portfolio managers and investment analysts with an excellent track record should be your go-to option. Luckily, finding firms like these would not be hard, as plenty of them have been turning in market-crushing profits with minimal internal upheaval. It would be in your best interest to determine if the managers invested a massive part of their net worth with other fund holders.
Choose a Philosophy Matching Yours
Like everything in life, you will find various philosophical approaches to manage money. Famous investors like Warren Buffet are prime examples that prove why having an investment philosophy is a must. These investors are always on the lookout for businesses trading at massive discounts. Putting their money in these businesses provides them excellent returns.
Some people also believe in the “growth investing” philosophy, meaning, they simply but the fastest and best companies regardless of their prices. On the other hand, some individuals firmly believe in having blue-chip only companies with excellent dividend yields. It is essential to have a mutual fund family sharing the same philosophy for investment as yours.
If you are a long-time investor, you will know that investing outside the United States is significantly higher. However, in the past, foreign stocks showed a low correlation with the stocks in the U.S. When developing portfolios to obtain wealth, there is a theory stating that these shares will most likely not hit hard when American equities crash, and vice versa.
It would be best to own funds from established markets like Brazil, Germany, Great Britain, China, and other countries. Sure, you can also invest in up and coming markets, but while they offer higher returns, the risks for losses are equally high.
You will find tons of excellent sources about selecting and choosing mutual funds, including the official mutual fund website. It goes into great depth to explain how and why you should choose these funds. Remember, being rational and disciplined is the key to achieve success in the mutual fund landscape. Moving inside and out of these funds will trigger tax events and incur frictional expenses.