How to Choose a Mutual Fund Company
Navigating the unpredictable sea of financial services is definitely challenging. If you want to get your feet wet in the stock market, mutual funds are a good starting place. If you decide to invest in mutual funds, do some basic research before choosing a mutual fund company. There are a few ways to purchase mutual funds, including through Internet brokerages, independent brokers and insurance companies. Different funds also have different fees, portfolios and investment objectives. These differences could affect your choice.
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Instructions
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Ask friends, family members or mentors about their mutual funds. If you have never purchased mutual funds before, browsing the Internet trying to find the best funds can be overwhelming. Seeking referrals from trusted sources is a good way to start comparing mutual fund companies.
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Compare the expenses and fees. One difference among mutual funds is their expense ratios---what it costs to own them. Depending on the amount of money you are investing, the type of shares you are purchasing and the structure of the mutual fund, the cost associated with owning that fund will vary greatly.
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Compare return histories and fund management strategies. Even though past results are never a guarantee for future performance, you can glean a lot about a fund based on its performance over various time periods. You may feel more comfortable with a mutual fund company that has been around for a while. The historical returns and investment portfolio of a fund are typically outlined in the prospectus. Some funds are actively managed by a team of people whose experience in the industry will lend credibility to the fund's performance history. Other funds may be more passively managed, while others may be index funds, which include all of the stocks in a particular index.
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Understand what you're buying. When you purchase a mutual fund, you're buying into a pool of stock. Every fund has a fund fact sheet and prospectus, and whoever is selling you the fund should provide this information. If you have something against a particular company, you may want to make sure that that company is not included in your fund. Similarly, if there's a sector of the market you'd rather not support (i.e., tobacco or alcohol production or consumption), then you should look for socially responsible funds, which avoid certain types of investments.
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Get a basic market education. If you're going to invest in mutual funds, make sure you understand what drives market volatility. Whether you have chosen to do-it-yourself or you have hired an adviser, you need to understand the amount of risk you have chosen based on the portfolio of stocks associated with your mutual fund account. You're the one signing the paperwork and paying to grow your money, so make sure you can stomach the losses just as well as you can celebrate the gains.
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Tips & Warnings
There are some common terms associated with the costs of owning or buying mutual funds. A "no-load" fund charges no upfront costs, but there still may be other expenses, such as a 12b-1 fee (a so-called "hidden" fee, which is deducted from the total value of each share of the fund; it pays for marketing and promotion of the fund). A "front-end load" is typically assessed on a certain class of shares until the account value has reached a certain point. A "back-end load" is only paid if the account owner withdraws money or sells shares during a certain period of time.
