How to Construct A Portfolio For Mutual Funds

Your portfolio is your total collection of investments. Stocks, bonds, real estate, gold and mutual funds are all common types of investments you might hold in your portfolio. When you are ready to construct a mutual fund portfolio, the key to success is diversification. You want as many different types of funds in as many different sectors as possible to achieve balance and make money.

Instructions

Difficulty: Moderate

Constructing Your Mutual Fund Portfolio

1. Decide how much capital you want to invest. Don't feel pressured to buy into funds beyond your means. You can always add funds later as your capital matures.
2. Determine your reasons for creating a mutual fund portfolio or for adding mutual funds to your existing portfolio. Knowing why you want to invest in mutual funds will help you choose which funds to add.
3. Determine your risk tolerance. Mutual funds are fairly safe investments. Some are safer than others, but all entail risks.
4. Choose which types of funds you want. Use new mutual funds to fill any gaps in your existing investment portfolio.
5. Investigate different funds in your sector to find out which have the best performance. You can use a style box, investment software or your own judgment to choose your funds. If you are uncomfortable selecting your investments, leave it up to your fund manager.
6. Take a look at the fund's prospectus to ensure that it fits your goals. Many mutual funds also have Web sites you can explore to find more information.
7. Investigate the fund's past performance. Although past performance doesn't predict future returns, you can find out something about the fund's stability over time.
8. Once you have done your homework, invest in a couple of funds you like the most and watch their returns.

Tips & Warnings

• Mutual funds invest in large amounts of stocks, bonds and so on, so they are a good way to achieve diversification without owning dozens of different investments yourself.
• Your mutual fund should keep you up-to-date on information regarding your fund through newsletters, email or quarterly reports. Find out how your fund manager will contact you and read the information he sends.
• Consider adding money to your mutual fund every month. It works like a savings account while increasing your return.
• Avoid mutual funds with high annual fees or front or back load fees. These detract considerably from your investment. You can find funds with low annual fees and no load fees.
• Remember that investing involves some level of risk. Mutual fund investing is generally for the long term, so don't pull out at the first dip in the road.