How to Pick a Good Mutual Fund

Look for mutual funds with low expense ratios and high ratings from independent sources.

Picking mutual funds for your 401(k) or IRA can be a challenging feat. Moreover, the selection of the funds can affect how much you save for retirement. Look for some key factors to guide you in choosing the right funds for your portfolio and put yourself on the way to a good secure retirement. Take a look at independent mutual fund screening websites to see how the funds you like are rated.

Things You'll Need

• Computer

Instructions

1. First, choose funds that have low expenses. Every fund charges expenses for management fees, administration services and a host of other costs. The expenses are indicated as a percentage of assets. It is key to find funds with lower expenses, because the lower fees will improve your returns, and the money saved is compounded over time.

2. Look at the tenure of the manager of the fund. Make sure past results from this manager are consistent with the overall market's performance, or better.

3. Low turnover is another factor to investigate in a mutual fund. A mutual fund manager should be purchasing stock for the long term, and a high portfolio turnover may indicate that the manager is not confident of his ability to select good securities. Also, a higher turnover normally leads to higher taxes for you as an investor.

4. Look at the asset size of the fund. Some people prefer to invest in large, popular funds. But when a fund becomes too large, it becomes increasing difficult for the manager to successfully apply her strategy and allocate the funds to the securities she feels are the best. The fund may move from small- and mid-caps to larger caps and performance may decrease.

5. Evaluate the style drift: when investments in the portfolio do not match to the strategy indicated in the prospectus. For example, if a small-cap fund has more assets classified as mid-cap as opposed to small-cap, it is guilty of style drift. This is a problem when you are looking a particular style of investment and find yourself with a different investment type.

Tips & Warnings

• Find a no-load fund, one with no sales fee, as well.

• Be wary of mutual funds that are recommended by a broker or adviser. The broker may be paid a hefty commission to push particular funds.

• Previous performance returns may not be indicative of future performance returns.

References

• Investopedia: How to Pick a Good Mutual Fund