Tips for Mutual Funds
Mutual funds are professionally managed investments that collect money from investors and apply it to a variety of underlying assets like stocks and bonds. Investing in mutual funds is a way to spread risk across many investments, called "diversifying," since a single mutual fund can invest in many different assets. However, fund prices can fall, if most of its underlying assets fall in value. Following a few basic investing guidelines can help maximize investment returns and limit risk.
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Request a Prospectus
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Thoroughly research any mutual fund in which you are interested to familiarize yourself with the types of assets it buys and its performance record. According to the Securities and Exchange Commission (SEC), mutual funds must send investors a prospectus that details its investment strategies, risks, fees, expenses and past performance upon purchase. Request a prospectus before you invest and compare information from different mutual funds to inform your decision.
Diversify Fund Holdings
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Although mutual funds have built-in diversification, they are not without risk. Mutual funds often focus on purchasing assets within a certain industry, such as the oil industry, tech industry or precious metals industry. Therefore, if an industry performs poorly overall, most of the underlying investments in a corresponding fund could fall in value. Spread your money across several investments that hold assets in different industries to reduce risk.
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Consider Fund Expenses
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The professional management of mutual funds can be both an advantage and a disadvantage. While professional investors may outperform the typical amateur investor, funds typically charge fees to shareholders to pay managers. The SEC states that mutual funds may charge fees for buying, selling and exchanging mutual fund shares, as well as annual account maintenance fees. Even if a certain fund performs better than average, high fees could result in lower than average profits.
Drop Under-Performing Funds
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Compare the performance of investments you hold to that of similar investments over time. Any investment can rise or fall unexpectedly in the short term, but a good investment should follow the overall trend and gains of its industry. If a fund consistently performs worse than similar investments for a few years, consider selling it and reinvesting the money in a different opportunity.
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