Selecting Mutual Funds
Many types of mutual funds are available. When assessing a fund, there are four main things to consider:
History — Many investment companies, banks and other financial institutions sell mutual funds. You may want to consider whether the company or fund has an established history of making good investments and achieving satisfactory levels of return.
Management — The management team of any fund has a direct impact on the success of the fund because their decisions determine what securities are bought and sold. Index funds that track a benchmark such as the Standard & Poor’s 500 Composite have no direct management and therefore move synchronously with their indices.
Philosophy — You many want to invest in funds that focus on or specialize in a particular industry or have a regional focus. Or you may wish to invest in funds with a particular philosophy, such as protecting the environment by investing in ‘ethical’ or ‘green’ funds. Sectoral, geographic or philosophic specifications for a fund may limit managers’ abilities to invest and therefore add risk and/or reduce potential gains. However, with careful construction, a portfolio of specialized funds can outperform broadly diversified funds.
Fees and risks — You should consider what fees the company charges for managing your money. Funds can be sold on a load or no load commission basis. Most funds also charge monthly management fees. Bear in mind that there is no relationship between fees and performance.
These decisions are critical, for merely investing in recent high-performance funds has been shown in numerous studies to be nothing but a way to lose money. Investors need careful, professional work in constructing a durable portfolio, just as much as they would need careful and professional trades in building a house.