How Can I Understand the Best Mutual Fund Plan?
The best mutual fund plans begin when you determine what you want to achieve and how much time you have to accomplish the goal. Is retirement your goal? If so, do you plan to retire in 30 years or five years? After answering these questions, choose a plan suitable for your goal. If you plan to retire in 30 years, review plans that offer growth. Keep in mind that plans which focus on growth involve risks. They may lose money, but they also have the time to recover from losses. If your time frame is five years, review plans that focus on providing interest income. These plans offer less growth potential but have less risk of losing money. Your goal drives your decision.
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Personal Goals
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To guide your plan choices, decide how you will use the plan. For long-term goals such as retirement, choose plans that provide growth potential. How aggressive the growth is best determined by how much risk you are willing to take. For short-term goals, choose plans that provide more interest and dividend income. These conservative plans offer less growth potential and less risk. They are better suited for the short term since recovery from losses is less likely the shorter the time frame.
Fund Types
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Income funds focus on providing interest or dividend income. Bonds and preferred stocks make up the largest part of the fund. Capital appreciation, the gain made when a stock price appreciates, may also be generated in an income fund but is incidental and not the focus. On the other hand, growth funds focus on investments that have capital appreciation. They seek stocks that have increasing earnings and the potential for price increases. Growth funds pose more risk since earnings can be inconsistent. Growth funds are better suited for the long haul.
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Fund Classes
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Fixed income funds pay interest with little growth. They invest in government or corporate bonds and are good for short-term plans. Large-cap funds pay dividend income with some growth. They invest in large companies with stable earnings and are suited for medium and long-term plans. Small-cap funds provide growth with little income. They invest in small companies with the potential for growth and are suited for long-term plans. International funds provide growth and speculation. They invest in foreign companies and are suitable for long-term plans.
Mixture
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To understand which plan is best, compare the mixtures of funds. For example, a short- term plan may consist entirely of fixed-income funds. Likewise, a long-term plan may include international, small-cap, large-cap and fixed-income funds at various percentages. The percentage of each fund within the plan determines how much income versus growth is expected as well as the risks involved.
Other Considerations
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Another consideration is the annual operating expense (AOE). The AOE includes expenses such as management fees, administrative costs, custodial fees and record keeping. These costs make up a small percentage of the price paid for the fund. Managed funds have higher costs than index funds. In a managed fund, the manager carefully analyzes securities to meet the objectives of the fund. For an index fund, stocks are selected to follow an index such as the S&P 500. Keep in mind that the higher AOE in a managed fund erodes gains when compared to an index fund. However, a managed fund has the potential to make more money than an index fund. In that case, AOE becomes less of a consideration.
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References
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