Tuesday, April 21, 2009

Mutual Fund Investing Tips

While this website is geared towards choosing stocks, in this article, I’m going to share a few tips on how to choose a good mutual fund.

What exactly is a good mutual fund. I’d define one as a mutual fund that outperforms its peers over a significant period of time. For example, a mutual fund that tends to invest broadly in large cap stocks is a good mutual fund if it beats the S&P 500. A good small cap fund would be one that consistently beats the Russell 2000 index. Remember, its relative performance, not absolute performance, that is the method to judge a mutual fund.

Finding a good mutual fund is the same as finding a good stock in the sense that it takes research and patience. Here are some things to look for when researching a good mutual fund:

1. Keep the fees low. Any fees you pay is less money in your pocket. Any good mutual fund should have a maintenence fee of 1.5% or less, 1% or less is preferable. Under no circumstances should you pay a load (upfront fee) to invest in a mutual fund.

2. Check out the asset base. Often, mutual funds become so bloated with investors money that they cannot invest as effectively. It is much easier for a fund to invest $1 billion in assets than $100 billion. As the fund gets larger, it has to invest in more and more stocks, and take larger positions in companies (which will often move the price of the stock).

3. Remember the sector the fund invests in. Just because the fund had a hot year last year doesn’t necessarily mean its a good fund to invest in. The sector that the fund focuses on may have just happened to have done well, so the fund got lucky.

4. Check out the fund manager. At the heart of mutual fund investing is the fund’s manager. This is the man or woman you are trusting with your money and believe will make the best investment decisions for you.

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