How To Select a Mutual Fund

Already Copyscape by Brian  

Selecting a mutual fund is overwhelming for the novice investor. With thousands of mutual funds out there, it is difficult to choose which one to invest in. After all, you are putting your hard-earned money into something that does not guarantee a good return on your money.  It is wise to be wary of each and every mutual fund that you encounter. 

Here is a step-by-step guide that a novice investor can follow if he or she wants to invest in a mutual fund.

1.   Check if the mutual fund's objective and investment strategy is the same as yours. You can find this information on the mutual fund's offer document on the Key Information Memorandum (KIM). Some mutual funds focus on long term growth, while others just the opposite. If you are investing in a mutual fund to save for your retirement, chooses equity funds because they usually outperform bonds and cash.

2.   Do some research on the mutual fund manager. Make sure that the fund's manager has at least three to five years experience in comparable funds over a full market cycle. By investing in the mutual fund, you are basically handing your money over to him. You would not want someone inexperienced taking too many risks with your hard-earned money.

3.   Compare the recent performance of mutual fund with the index fund and other comparable funds. Be mindful, however, that you do not look too far back as you might end up "chasing" performance. Mutual funds are plagued with ups and downs so it will be hard to judge one on its recent performance alone. A better gauge to use is the fund's annual compounded performance for the last five years. This will give you an idea on how consistent the fund's performance is. 

4.    Look at the fund's expense ratio. Owning a mutual fund is not exactly cheap. There are fees to be paid, including advisory fees, operating fees, 12b-1 distribution fees and other administration fees. The expense ratio tells you much it costs to own a certain fund. Obviously, choose one that has a lower expense ratio than comparable funds.

5.   Find out if the fund charges sales load. This is money paid to the broker before or after a fund is sold. You do not really want your fund of choice to have one because it does no benefit to you and is actually an expense on your part.

6.   Determine the standard deviation of the fund. The volatility of a fund is measured by getting its standard deviation. You do want a fund that has a high standard deviation because it means that it is highly volatile. Choose one that has a lower standard deviation because it does not put your money at too much risk.

7.   Check the fund's annual turnover. This measure represents the percentage of the annual change in the fund's holdings. If you choose one that has a high annual turnover, you will be paying more in terms of commissions so, in general, choose one with a lower annual turnover than comparable funds.