Choosing a mutual fund manager can be intimidating, since there are thousands and thousands of mutual funds out there. However, there are a number of steps that can help focus your choice.
First, choose a mutual fund that has a management style that fits your investment goals. If you are a conservative investor, a mutual fund run by an aggressive manager would be a poor fit for you. If you want to avoid paying taxes on capital gains, a manager who is turning over the mutual fund’s portfolio too frequently would be a poor choice.
Secondly, you want to choose a fund manager that has a good track record. You don’t always need to pick last year’s #1 fund, since that firm’s manager might have gotten hot and had an influx of cash into the fund from people chasing the mutual fund du jour; the manager’s returns will often be depressed in that case. A fund with returns that match or beat their peers for the long haul is a good choice.
Thirdly, look to choose a fund with low management fees. Management fees can eat into any profits from the fund. A 2% management fee turns a 10% gain into an 8% gain; better to have a 9% gain and a 0.25% management fee for an 8.75% net gain. Also, high management fees often come with more portfolio turnover in a fund, causing more realized capital gains and a higher tax bill.
A no-load mutual fund is always a wise choice. If you are doing your own homework on mutual funds, you don’t need to use a broker to buy a fund. A 4% load means that only 96 cents on the dollar gets invested and the first 4% of your profits essentially go to paying the broker. You’ll also want to avoid 12-b-1 fees, which are yearly fees for fund marketing. No-load funds do as well as load funds, so don’t pay fees that don’t help you make money.
Finally, you’ll want to choose a mutual fund family that has a solid track record and a broad selection of funds. This will allow you to have a more reputable firm that can help lower management costs, since there is a larger pool of mutual fund money to spread the fixed cost of fund management over.
If you follow those rules, you should be able to choose a mutual fund you can live with.