Mutual funds are one of the investment options where you can invest your extra cash. As a mutual fund investor myself, I made a post on how to invest in mutual funds before to assist my readers interested in investing in mutual funds.
According to Kiyosaki, mutual funds are investment vehicles for a person to use as part of his or her financial plan to be secure or comfortable, not rich. Because of built-in management, mutual funds may be a better choice than stocks for new investors who lack the resources to pay a full-service broker or to create a diversified portfolio. Selecting mutual funds is not that different from selecting stocks, since you must first decide what types of funds you’re interested in, then evaluate their past and current performance.
Before sinking your hard-earned money into mutual funds, be sure to read its prospectus carefully. The prospectus is a financial document required by the Securities and Exchange Commission (SEC) that describes the fund to potential investors. You can request a copy from the mutual fund company itself—either by phone or through the company’s website—or from your broker.
The SEC requires that each prospectus contain certain information that makes it easier for you, the investor, to compare different funds. This information may be organized differently from one prospectus to another.
Here are some information on what you should look for a mutual fund:
Compare your financial objectives with the fund’s. As you read over a prospectus, compare your own financial objectives with those of the fund. For example, are you looking for aggressive growth (which could yield high returns over the long term, but with a lot of volatility in between) or value (which could yield lower returns over the long term, but with less volatility in the meantime)? The type of companies in which a stock mutual fund invests will also tell you whether the fund matches your investment goals. Are they small-cap companies carrying high risk but potentially high returns? Are they large-cap blue chip companies that offer a generally safe return on investment but no room for explosive growth? And what about risk? For example, are you willing to accept the risk involved in an international fund, which is vulnerable to fluctuating international currency rates?
Avoid funds with high fees and expenses. Closely examine the fees and expenses laid out in the prospectus. You want to minimize the amount you pay over and above your investment. Compare the operating expenses of any funds you’re researching and avoid those with high figures. Management fees range anywhere from 1 to 5 percent, which over time can significantly reduce capital gains. In some cases, you may be required to pay a load, or commission, when you buy or sell shares. You’ll recall that a front-end load is a commission charged at the time of purchase. A back-end load is charged if you sell your shares before a specific period has elapsed. A level load is a flat annual fee. In general, you’re better off looking for no-load funds. Don’t forget to read the fine print; footnotes may outline additional fees or expenses.
Examine the fund’s financial condition. A prospectus will present you with a condensed version of the fund’s financial condition. Required information includes current and historical data (up to ten years) of the fund’s total returns, as well as yields, turnover rate, and dividends, interest, or capital gains paid per share. A high turnover rate, meaning that the fund frequently sells investments and buys new ones, might mean increased commissions to brokers and other related costs, which could reduce the fund’s returns to you. Look for decreasing expense ratios over time; this indicates that expenses haven’t increased even if the size of the fund has.
Beware of funds with inexperienced managers. Check the fund manager’s credentials carefully, and see how long the manager has been in charge. Has this person been around for a while? How has the fund performed during this period? Think twice about investing in a fund whose manager has been in charge for less than five years—that person’s inexperience may cause your investment to underperform.
Request additional information. Prospectuses don’t always include all the financial information to which you’re entitled access. For example, the statement of additional information is an SEC-required document that offers in-depth detail about such things as the fund’s investment strategies, restrictions, past performance, and specific investments. The statement of additional information also mentions any legal actions pending against the fund. You should request a copy of this document if it’s not included in the prospectus.
Similarly, if you’re not sent copies of a fund’s quarterly and annual reports, request them. They outline the fund’s performance and may compare it to the performance of other funds over different periods of time—a valuable tool when you’re deciding whether to buy into a fund.