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What to Look for When Selecting a Mutual Fund

April 16, 2012 | Comments: 0 | Views: 137

When selecting a fund, the investors should take a look at Morningstar ratings of the fund.There are two types of ratings provided. One is the old star system where funds are ranked from one star (the bottom 10%) to five stars (the top 10%). This is based on the past performance. Although, it doesn't guarantee the future results, this ranking separates poor managers from those that do better, especially when it comes to five stars versus one.

Recently, Morningstar decided to add a second set of ratings, which are based on the future outlook with the scale consisting of gold, silver, bronze, neutral, and negative.

Thus, selecting funds with 4 stars or more, as well as gold or silver outlook, can improve the chances of better performance.

Another important factor related to performance are the fees. The lower the fees the better. Moreover, investors will likely do better if they purchase no-load funds where no sales commission is charged. Loads can be as high as 6%, which significantly reduces investment returns. Furthermore, many brokerage houses offer investing in funds without transaction costs. Saving commission is another plus when it comes to better returns. Even small saved sums accumulated over many years will add to substantial amounts.

Those who still can't find a right fund, Index funds are a good alternative. These vehicles seek to closely follow an index (such as S&P 500), while charging lower fees than actively managed mutual funds. Although, this passive investment can't beat the index, it will not perform much worse either.

Given the vast array of funds available, and information readily accessible via the Internet, the investors have more options than simply listening to their financial advisers who may not necessarily act in the best interests of their clients. Rather, they may seek to recommend the most expensive funds where the commission is the best.

The fees and performance are crucial. But, the investors also need to consider the minimum initial investment necessary to open a position in the fund as well as the minimum subsequent investment amounts. These differ among the fund families. In addition, funds establish different amounts for regular and IRA accounts.

One final note is that mutual funds are not the right vehicles when it comes to short-term investing. Rather, the mutual funds are long-term investments. Those seeking to take advantage of short-term opportunities should look into Exchange Traded Funds (ETFs).

Source: EzineArticles
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