You are all plans to invest in mutual fund but before buying a mutual fund, it would be safe to go through all the points mentioned below. As with 10, 000 mutual funds to choose from, there all the possibility you can be misled or misguided into choosing the one you should not. With all this said investing in mutual funds can be the smartest financial decision of your life.
Prospectus; by law, you should receive a prospectus from the fund company before you invest in it. Many investors ignore the prospectus, but this is a must read. The mutual fund's objectives are displayed in the prospectus. It tells you the goals of the fund and how it intends to achieve them. You will also find information about the fund's past performance and fees.
Mutual Fund Fees: The fees are displayed in the prospectus as well as on many mutual fund research sites. Try to buy funds with low expense ratios and certainly avoid 12b-fees. I have yet to hear a valid argument on why you should ever buy a loaded fund. A loaded fund is a fund that carries front-end loads, back-end loads or deferred loads. These loads are basically sales charges. There are plenty of no-load funds to meet your objectives.
Objectives
Why are you buying this fund? Is it because you read about it in the paper or a neighbor told you about it? Don't get caught in the trap of chasing performance. Buy a fund because it meets an objective in your portfolio, not because it has done well recently. Asset allocation is the key to successful investing.
Returns or Performance: Don't focus too much on returns. Any track record under 5 years is noise. Try to take a look at how a fund has done over longer periods of time and try to compare it to it peers or an index that represents the type of asset class the fund is in. It is not fair to compare a government bond fund to the NASDAQ.
Risk Take a look at the standard deviation of a fund. If Fund A did slightly better than Fund B, but took twice as much risk as Fund A, then Fund B would be the better choice. Other measures of risk include the Ulcer Index and the worst periods (ex. 1-month, 3-month, one year). Don't take any risk that you are not comfortable with and never take unnecessary risks.
Management What firm serves as the fund's adviser and who manages the fund? It might not be a bad idea to do some background checking to make sure it is a decent entity. The SEC is the official watchdog for mutual funds and has information about each fund and it's manager. Also look out for recent manager changes. Though a new fund manager may be just as good or better, it is important to realize that all the fund statistics from before may not be relevant, especially in an actively managed fund.
