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Selecting the Right Mutual Funds: A Short Guide

June 16, 2012 | Comments: 0 | Views: 189

According to financial experts, mutual funds shouldn't be selected merely on the basis of past performance and fundamental analysis of indices. First of all, you need to understand that investments of any kind in the market do not provide overnight results. People who expect instant gratifications are often caught in the grip of investment plans that make big promises and deliver almost nothing great.

Mutual funds are fast emerging as favorite investment avenues for millions of small and big investors all over the world. This large scale popularity is mostly due to the reason that mutual funds on an average have 3 to 4 dozen stocks in a single portfolio. Therefore, risks are significantly cushioned due to such large scale diversification. Below you'll find a short guide on selecting the right mutual funds for yourself:

1. Understand your own investment objective first of all. A mutual fund should be chosen according to your unique needs. You need to know whether you're looking to invest in capital growth or a retirement plan! Having a clear idea of your personal needs can help you to make an informed investment decision.

2. Draw an expected time frame for both investment and returns. It is very important to be consciously aware of this time frame when selecting a mutual fund. If you prefer to get returns over the short term, you need not invest in equity funds, for example. For short term returns, an investor should study available floating rate funds or money market funds instead.

3. Once you have finalized the right kind of mutual fund investment plan and timeframe for yourself, it is time to look out for various sources that have such plans on offer. Get in touch with financial advisors to gather this information quickly. You can also rely on financial blogs and investment comparison websites for such information to some degree.

4. Use mutual fund indices to select companies that have been performing well over the last couple of years. You can rely on some of the most standardized industry indices such as S&P fund index, Nasdaq 100 and Russel 2000. If you want to know about socially responsible funds, you can rely on DSI index for the best comparison. Even if the market has been going through turbulent times over the past couple of months (or years) a good mutual fund should show a good amount of consistency.

5. Once you're done short listing companies and plans, you need to get a clear idea of various taxes, fees etc. involved. Directly ask representatives of a company to explain the effect of additional fees and taxes on your overall returns.

6. The best investment is the one that involves least amount of risk. In order to find out whether a plan under consideration is safe or not, you can inquire about its Sharpe Ratio. This number is a good indicator of riskiness of a fund.

7. If you want to build a big asset over a long period of time, you may want to choose a plan that allows you to make smaller contributions in the beginning.

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