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Mutual funds employ a variety of investment strategies that are geared to the needs of different investors. Growth funds invest in the stocks of companies that show the potential for strong earnings and equity appreciation. So-called "aggressive" growth funds take this a step further by seeking out riskier, but potentially very profitable stocks and may use options to enhance earnings. Bond funds, on the other hand, focus on quality debt securities issued by corporations and governments with the objective of producing regular income with low risk.
As an individual investor, it's important to clearly identify your goals and develop a strategy that serves your needs. If you are young and want your portfolio to grow, you'll want to focus on growth funds. A retired person is more likely to want the steady income of a bond fund. Of course, not all mutual funds fit neatly into these categories. Some use combined strategies to generate moderate income and equity growth. Others invest in specific sectors such as "green" technology firms or in foreign companies, so you have a wide range of choices. -
Before you go shopping for a mutual fund, learn how the fee structure works. Mutual funds can charge two types of fees. All funds charge fees to pay administrative and management costs. The fund's expense ratio measures how much of the fund's assets go toward operating costs each year. The second type of fees that some funds charge is sales fees, or loads. Loads are commissions paid to brokers or financial advisers for marketing the fund. A load can amount to as much as 8 percent of the money you invest and is deducted from your account. Most financial analysts recommend no-load funds for this reason.
Some funds charge separately for transaction costs. This "12b-1 fee" may be included in the operating costs for no-load funds and is limited to 0.25 percent a year. Load funds may charge a 12b-1 fee as an ongoing annual deduction, in which case it may be as much as 1 percent of your investment. -
Many financial information websites offer listings and independent analysis of mutual funds, including Morningstar.com and Fidelity.com (weblinks below). However, your primary resource for evaluating a mutual fund is its prospectus. This document is required by the SEC and must disclose full details of the fund's operation and performance. You can usually download a copy from the website of any mutual fund in which you are interested.
Look first at the fund's performance history for the past five to 10 years and compare this with similar mutual funds. Read the terms and conditions carefully. Finally, examine the fund manager's track record and investment philosophy. If a fund has had a recent change in management, try to check the new manager's track record to see if you can expect good performance in the future.
