A mutual fund refers to an investment instrument in which many investors invest their money in a pool together, which is then used by a team of experienced experts to invest in a portfolio of their choosing, involving bonds, securities and any other such assets.
Mutual Funds have become one of the most common avenues of investing for individuals who lack understanding of the financial markets but hope to see their money grow. Nowadays it seems almost every advertisement in the newspaper and television seems to be propagating a mutual fund and how it’s the godsend to appreciate your money. However not every Mutual Fund is good and not everyone is good for you, so let’s analyse some of the factors involved in picking a good mutual fund for you:
While some Mutual Funds have shown instanced of extremely high return rates in record time, most of these have been achieved through risky investments, Not every investor has his eyes set on making his 100 into 100000 at the risk of losing it. Before investing in a fund, first have a clear goal of what your risk tolerance is and what you expect to gain. Some common useful instruments of measuring risk are the Variance, The Std Deviation and the Sharpe Ratio. Also make sure to have a look at the Alpha of the fund, which tells us how it compared to the benchmark.
Some investors may consider investing in a Mutual Fund akin to putting money in a fixed deposit in a bank. In this scenario Capital Appreciation funds are more suited for them as this has a very high likelihood of appreciating the money over a period of time These funds, however, do not provide dividends so investors hoping to maintain income through these investments will be unsuccessful. For older individuals who are looking to retire and have a fixed income through the funds, investing in funds centred along bonds and dividend paying stocks may be a more valid option. An example of such types of stocks are Income Funds.
The expense ratio of a fund refers to the amount of the invested assets that are utilized in running the firm. Running a fund can be pricey and investors should keep a lookout for how high these ratios might get as this will cut into their profits.
Once you have decided on the type of Mutual Fund, you’re interested in you can now compare the similar types of funds to pick the best ones. As mentioned earlier, the Alpha of the firm is an excellent indicator. Also compare the firm to some of your own benchmarks. Good benchmarks may be the S&P 500, The Dow Jones Industrial Average or any index in the industry. Also don’t simply choose the highest earning firms. Have a look over time and pick out the ones that consistently show a solid performance as these will be the ones who have a good track record.
These are some of the main points to look out for when picking a Mutual Fund. Remember, it’s your money that’s being invested so make sure to take your time and do your research.