How to Find the Right Mutual Fund
Mutual funds are collections of stocks or bonds that are part of the "holdings" of the fund. When you buy into a mutual fund, you gain an ownership stake in these holdings and the profits that they produce. There are thousands of mutual funds on the market, some of which specialize in particular segments of the economy. Choosing the right mutual fund for you depends on your goals, your time line and your ability to tolerate risk. Research is key to making the best investment to fit your goals.
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Instructions
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Allocate your assets to achieve goals. Consider the amount of money you have to invest and what level of risk you are willing to tolerate. Bond funds are less volatile than stock funds, but may yield lower results. Stock funds, though they may be more volatile, may give a higher return. Balanced funds, which hold both stocks and bonds at a percentage of 40 to 60 percent either way at any given time, offer the advantages of both, but will return less than pure stock funds. Divide your money into portions that allow you the measure of safety that you need. There are a number of asset allocation calculators available from mutual fund companies and investing information sites, such as the one at CNN.Money.com, that can help you determine your risk tolerance and what percentage should be in stocks or bonds (see Reference section).
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Educate yourself about mutual funds. Go to your local library and read some of the books available on mutual fund investment. There are also periodicals that chart current high-performing mutual funds and funds that have a history of good performance. The Internet also has many investing sites that will help you learn about the mutual fund industry.
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Research funds that look interesting. Get a prospectus from the mutual fund company and read it. Prospectuses are very dry reading for the average person, but it is important to know the manager of the fund, his track record, the fund fees and the performance of the fund in recent years. Look for fund managers who have at least five years of successful performance in both bull and bear markets, as recommended by ConsumerAffairs.com. Also, be aware that some mutual funds have "loads" or fees when you buy in, and "redemption fees" when you sell shares to get your money. Reading through the prospectuses of several different fund companies will give you a good idea of the best fund for your needs.
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Purchase mutual fund shares from the company you have chosen. Some companies have applications online or can send you an application by mail. Send in your check, and you will receive an initial information package and monthly or quarterly statements of your fund holdings.
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Buy more shares of the fund regularly. Continuing to buy shares allows you to make use of "dollar-cost averaging," which means you buy some shares when the price is higher and some when it is lower, thereby "averaging" a lower price-per-share cost overall.
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Tips & Warnings
Mutual funds that concentrate on specific areas of industry like energy or health care may have higher returns but greater volatility.
References
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