How to Pick a Mutual Fund

You don't have to be a financial wizard to succeed at picking mutual funds. Just follow these basic guidelines and you'll improve your chances of picking a solid fund.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Money to invest
• Knowledge of the market
• An understanding of industry terminology
• Internet access
• Financial advisor
• Accountant
• Tax advisor

1. Start small. You can invest in a mutual fund for as little as $100 and there are no trading costs.
2. Avoid sales charges. Also known as loads or commissions, these charges may be incurred for buying (front-end load) or selling the fund (back-end load, deferred sales or redemption fees). Stay away from them.
3. Look for low expense ratios. These ratios represent the annual fees that mutual funds charge and include management fees, administrative costs, distribution fees and some operating expenses. If possible, these fees should be under one percent annually.
4. Seek low turnover. The longer a stock is held by a mutual fund and the less trading that is conducted, the lower the turnover. An annual turnover of 50 percent is desirable; 20 percent is preferred.
5. Check for consistency. Pick a mutual fund that has yielded good returns year after year. That indicates the fund can be successful under a variety of conditions.
6. Consider the manager. Managers determine when a fund's stock or bond should be bought or sold. Look for one who has longevity with the fund and company.
7. Ask the experts. Search the Internet for financial planners, investment advisors and mutual fund companies. You also can access information on all varieties of mutual funds and what experts consider to be the top picks.
8. Review periodically. After you have selected your mutual fund, set up a regular review schedule—generally at the end of the year—to ensure its performance remains consistent with your investment objectives and level of investment risk.

Tips & Warnings

• Look at a fund's track record and portfolio. Don't obsess over a mutual fund's double-digit return.
• Review the fund company's prospectus before investing. You'll learn the goals and its strategy for achieving them.
• Seek the advice of an accountant and/or a tax expert regarding the implications of your investment before you buy.