Mutual Fund Tips

A mutual fund is an investment company which pools the capital from many investors and invests the money in stocks, bonds, short-term money market instruments and assets. Holdings included in a mutual fund are referred to as a portfolio, and understanding how to grow your portfolio is key to achieving greater profits. Each share bought into a mutual fund represents the equivalent portion in mutual fund holdings.

Considerations

There are three primary considerations to mutual fund ownership. Mutual funds are not guaranteed or insured by the FDIC (or any government agency), past performance is not a reliable indicator of future performance and most mutual funds have costs which lower the total return on your investment. This requires shopping around for a mutual fund by looking at reviews, contacting your broker and using the mutual fund calculator provided by the SEC. The calculator provides an objective view of the costs of total ownership for different mutual funds. See the Resources below for a link to the SEC calculator.

Factors of Profitability

While mutual funds are recommended for novice investors, they are not guaranteed. Over the long term, factors such as the fund's sales charges, fees, expenses, tax obligation, age, size, risks, volatility and changes in operations have proven to be a better indicator of fund performance than historical fund performance. That is, past results are not indicative of future returns.

Prospectus

The best way to evaluate a fund is to review the prospectus. The prospectus is a legally-mandated document that provides relevant investor information. It is much like a 10K for the mutual fund world. It will also provide information on historical results and shareholder reports. Use the prospectus to compare the fee structure, tax requirements, risks, changes in operations and the types of services offered, like check writing and automatic investment programs.

References

• SEC: Invest Wisely: An Introduction to Mutual Funds

Resources

• SEC: Calculator