Six Steps To Pick A Good Mutual Fund To Launch Your Savings

Buying your first mutual fund may seem complicated and risky, but this is something you can do everything by yourself. This straightforward guide will walk you through the key steps to look for the right fund for your objectives.

1. Define your investment objective: before you buy a mutual fund, you need to understand why you are making this investment, when you expect to need the money and how risk tolerant you are—remembering that all mutual funds have risk, some much more than others.

2. Use a mutual fund screener: Yahoo! Offers a mutual fund screener (it.Ly/Khm6m3) that you can use for free to find a fund that suits your criteria. Without using a tool of this sort, you simply cannot find and review all of the available funds to study.

3. Match your objective to the fund: if you are a long investment horizon, that is, you won’t need the money back for a long time, you may be invited to take more risk by investing in a mutual fund that invests in growth stocks. If your investment horizon is very short, you would probably want to invest in a fund that invests in short term bonds or even a “money market” mutual fund that keeps your money liquid, trying never to put your capital at risk at all (in very rare circumstances, some money market investors have lost small fractions of their investments). In between these extremes, you may want to get a fund that invests in both stocks (or equities) and debt (bonds).

4. Consider the costs: mutual fund managers collect their money by charging investors of small fees to enter the fund and the money each year. The “lead” refers to the fee to enter the investment and the “expense ratio” refers to the annual cost. If is there involved in a fund with a 6% load and a 2% expense ratio, your fund will be required to generate an 8% annual return (tough to do) just for you to break even in the first year. Look for “no load” funds and funds with low expense ratios. Many of the lowest cost funds are “index” funds that don’t try to beat a market index. They just try to match it. Given that very few funds consistently beat the market, focusing on fees is an excellent way to keep your money growing.

5. Evaluate Risk: think your personal appetite for risk and screen mutual funds to find those that appeal to your sense of adventure or your fear of falling, as the case may be. Remember that risk is generally compared among funds of the same class. So a risky short term bond fund may be a safer bet than a “low risk” growth equity fund.

6. Investment: generally, you can invest directly with the fund itself by sending them money directly—visit the Fund’s website for instructions. If you plan to invest all of your money in one mutual fund, that’s the best way to be doing. If you plan to invest in multiple mutual funds over time, you may wish to open a brokerage account with Schwab, Fidelity or TD Ameritrade where you can invest in a variety of mutual funds easily.