How to research mutual funds

Research before you invest

Mutual funds are one of the best ways to invest in the stock market without having to buy and sell individual stocks yourself. Mutual funds offer professional management and solid returns, but the trick is finding the right mutual funds to invest your money in.

Difficulty:

Moderately Easy

Instructions

Things You'll Need

• Internet
• Mutual Fund Checklist
• Bank or brokerage account

1. Many investors choose a mutual fund because they do not have the time to research individual stocks all the time. This is fine, but mutual fund investors need to realize that mutual funds require research in order to find the best of mutual funds as well. Not all mutual funds are created equal and if you are like me, you want to find mutual funds that are top performers over the long run to best make your money work for you.

2. Making a mutual fund checklist is very helpful

   I highly suggest making a mutual fund checklist, whether it be on paper or on an excel spreadsheet. This will allow you to track several categories and find which mutual fund is the perfect one for you. When I create a mutual fund checklist I have the following headers: 5 year performance, 10 year performance, manager tenure, minimum initial investment, and expense ratio.

3. Now it's time to decide which sites you would like to use to research mutual funds. There are plenty of sites that contain a wealth of information, so your choices aren't limited. I like to use Morningstar, Wall Street Journal Online, and Yahoo Finance. I have included links to all three of these in the resources section below.

4. Let's breakdown each of the mutual fund checklist items:

   The five and ten year performance is a backward looking measure which shows you the average return per year of a certain mutual fund. I believe looking at five and ten year performances are far more helpful than a smaller sample such as six months or one year.

5. Next on the mutual fund checklist is the manager tenure. Why is this important? Quite frankly because you want to know if the current manager is the one that is responsible for either the positive or negative performance of this particular mutual fund. If the mutual fund you are researching looks great, but they just got a new manager a month ago that should raise some red flags that you might want to hold off on that one for a while.

6. Next on the mutual fund checklist is the minimum investment amount. I keep track of this because different mutual funds vary wildly on how much an investor must commit to invest in their fund. Some funds start as $250 while others require $100,000 or more.

7. Last on the mutual fund checklist is the expense ratio. This will tell you how much you would be paying every year to own this particular mutual fund. While 2% may not seem like a lot, it can eat away at your returns pretty quickly over time. Look for funds with a reasonable expense ratio that is closer to 1% or even below.

8. Make your mutual fund investment work for you!

   Researching mutual funds isn't difficult, but it can take some time. In the end taking the time to know where the best place to invest your money for the long run is certainly worth it.

Tips & Warnings

• Always look for funds with no load, meaning there is no sales charge when you put your money in or when you take it out.

• Be careful of investing in a mutual fund that a banker or advisor suggests without researching it on your own. These can have very high expense ratios that drag down your return quickly.