Before you make an investment purchase it’s important to compare mutual funds available to you. There are a variety of things you should take into consideration to compare mutual funds in order to find the right investment for you. Here are some things to think about when you compare mutual funds.
The first is your investment goals. There are many factors that contribute to an individual’s investment goals. Do you need more money for retirement? Do you need income through dividends right now? Do you have a child’s college to pay for in a few years? Are you young with a retirement account that you can visualize growing exponentially over the years? All of these questions are important to consider as you compare mutual funds and other investment options.
Once you’ve determined the goals that you need to achieve through investing, you should assess your comfort level with risk. These two questions are closely related. For example, a person who is investing the money they will need to live on just a few years is not likely to be comfortable with a great deal of risk in their investments. On the other hand, a young person who has a lump sum of money and many years until retirement may be very willing to assume a fairly high level of risk in their investments. With these two critical questions answered, you’re ready to compare mutual funds that are consistent with your personal investment goals and your risk level to see which ones are right for you.
At this point, it’s time to specifically compare mutual funds, one to the other. There are several things you should look at as you compare these mutual funds. The first is performance. Though past performance is not necessarily an indicator of future performance, meaning there are no guarantees; past performance will help you ascertain if the mutual fund has done well in the past and if you believe it has the potential to continue to do well.
Another item to evaluate when you compare mutual funds is the fund management. For example, your mutual fund company will likely tell you what their overall investment philosophy is, as well as their focus and philosophy for the particular mutual fund you’re considering for an investment. But, has the company consistently kept this philosophy and managed their funds according to it? It’s one thing to advertise a philosophy, but it’s wise to ensure that this philosophy is put to use when day to day decisions about the fund are being made. This management consistency is critical to ensuring the goals of the fund are consistently adhered to.
Finally, you should pay close attention to the associated costs when you compare mutual funds. Some funds charge an up front sales commission called a “load”. This fee is a percentage of your investment amount and is paid to the sales person. Some mutual funds are “no load” meaning no upfront commission is charged. Other mutual funds are back loaded, meaning your fee is paid at the time you sell your shares, not at the time you buy them. In some cases, these fees are reduced by holding the shares in the mutual over time, even to the point of eliminating the fee altogether if you hold the shares long enough. In addition to these load fees, you may be charged transaction fees each time you buy, sell or transfer funds, and you may be charged yearly management fees. Mutual fund fees are a necessity, because the mutual fund money must make money, too; however, you want to be certain that you understand the fee structure and that you consider these costs when you compare mutual funds.
Mutual funds can be a great way to invest your money. Pay close attention to the details as you compare mutual funds and you should be well on your way to a great investment in your future.