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Things to Consider Before Investing in Mutual Funds

Omkar Phatak Aug 21, 2020
If you are looking for a mutual fund investment guide, you've landed on the right page. In this story, I will walk you through the process of choosing the best mutual fund, that's most well aligned with your investment goals.
If you are looking for a guide that points out the most important things to consider before investing in mutual funds, you need not look any further. In this Story, I present you with a short guide on choosing the right mutual funds.
If you want to participate in the investment action of stocks, bonds and money markets, without the responsibility of engaging in market research, that it requires, then, putting your money into mutual funds is a smart decision. By investing in mutual funds, you let a qualified and experienced fund manager make the investment decisions on your behalf, and you reap the benefits of the profit made.
However, one decision which you cannot leave for anybody else to make is the choice of the mutual funds to invest in. It's essential that you know the most important things to consider, before investing your money, which will aid you in choosing the right investment. In this WealthHow article, I have helped you in that department, by presenting a list of questions that you must ask while researching the various mutual fund options made available in the market.

About Mutual Funds

A brief review of how mutual funds work and why they are one of the best ways to invest money, would be helpful to point out, before I present the main scrutiny issues that you must consider while selecting one.
The idea of a mutual fund is simple to grasp. All the money invested in a mutual fund is pooled together and invested in a diverse range of securities, which includes bonds, stocks and money market investment vehicles.

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Investors have no control over investment decisions which are entirely made by the fund managers, who have the requisite expertise and experience to make them.
Every investor gets a share of the profits made through the investments. Mutual funds are sold in the form of shares at their net asset value. There are various types of mutual funds, classified by the type of securities they invest in. Fund managers charge fees and expenses as remuneration for managing investor portfolios. In short, a mutual fund is a professionally managed investment portfolio, that promises substantial profits in the long term. Let me provide you with a short guide on investing in mutual funds.

Mutual Fund Investment Guide

Many people fall for the big promises made by upcoming mutual funds, without researching the financial fundamentals of the organization operating it. No wonder they end up losing their money as investments shouldn't be made on the basis of promises. There are many factors which must be taken into consideration, to separate the race winning horses from the also rans. Here are the questions you must seek answers to, in order to be sure that you are making the right mutual fund choice.

Is Past Performance of the Mutual Fund Promising Enough?

While past performance cannot exactly determine how a mutual fund will perform in the near future, it can certainly help you decide the odds.
A mutual fund that has consistently performed well in the last 5 to 10 years, by maintaining a sizable profit margin throughout, tells you that it has been managed well in the past and has a promising future. The bottom line is, look for a best mutual fund, that has offered sizable returns consistently.

What Sectors is the Mutual Fund Investing In?

Read the mutual fund prospectus thoroughly and know about the sectors in which it will invest your money. By determining the recent performance of stocks and bonds, assess the degree of risk involved in investing in those sectors. It is more advisable to go for mutual funds which have a diversified portfolio and are open to adapting their investment strategy, according to market conditions.

What are the Fees and Commission Amounts Charged?

The professional portfolio management comes at a cost, and the commissions and expenses that you pay for, eat into the quantum of profit which the fund makes for you. Ergo, it's essential that you check out the fees charged by the fund, as over a period, they can severely cut down your profits.
Look for mutual funds which have provided moderate return consistently at reasonable fees, rather than going for high return mutual funds which eat into your profits with high fees and expenses. Do the math using mutual fund investment calculators provided on the SEC (Securities and Exchange Commission) website, to know the long term impact of fees charged, on your profits.

Is it a Load or No Load Mutual Fund?

Most people are unaware of the load and no load mutual fund differentiation. Load mutual funds come with extra charges incurred because of arbitrage, charged by middlemen.
Besides the fees charged by mutual fund itself, when you buy mutual fund shares from a brokerage, extra charges for sale and purchase further bring down your profit margin. Instead, go for no load mutual funds, that are devoid of any brokerage charges, which can be directly bought from the management companies of mutual funds.

How Frequently Does the Fund Turnover Its Portfolio?

A portfolio turnover rate determines the frequency with which the stocks and bonds that are a part of the portfolio, are bought and sold by a fund. A portfolio with a high turnover rate is not good news. Rather, go for mutual funds which offer a mixed portfolio, with money spread over diverse risk range and a moderate to low turnover rate.

How Consistent Have the Generated Returns Been?

This is the most important question, that you should ask. A high amount of return in a short burst of time and a low return otherwise is not an indicator of a well managed fund. 'Look for consistency' is the mantra.

How Will the Fund Affect Your Taxation?

Capital gains derived from the mutual funds are taxable and you need to do the math and calculate how much will taxation eat into your profits. If the taxes reduce your total profit margin to a trickle, there is no point in investing. Make the taxation calculation to determine the amount of profits you can hope to derive.

Who is at the Helm of the Mutual Fund?

Most private investment firms operate on the basis of the reputation of their fund managers, who have been known for their maverick investment decisions. Knowing that an experienced manager with a proven track record and sound investment insight, is at the helm, an investor can feel safer when putting money into such funds.
These were some of the most important factors, that you must check out to make the right mutual fund choice. Mutual funds which have delivered sizable returns consistently and for a long period, while charging reasonable fees and expenses, with a good investment manager at the helm are ideal investment options.
Patiently scan the details of mutual funds, with a discerning eye and read the prospectus in detail, to choose the mutual fund which best aligns with your investment goals. Ask the right questions and base your decisions purely on logic and numbers, rather than fanfare and big words!