Mutual funds are great investment vehicles. They combine money from hundreds and thousands of investors to create a financial portfolio of stocks, bonds, and real estate, among others. Moreover, every investor gets a slice off the total profits. In order to succeed in mutual fund investing, here are six important tips:
1. Keep ongoing expenses as low as possible. Closely monitor sales charges and other fees of your mutual funds. This is crucial for newbie investors who want to keep their own money working for them as much as possible.
2. Be wary of short-term performance. Do not be overwhelmed by spectacular one-year performance figures. In evaluating funds fit for long-term investment, look at past performance in terms of return, within three, five, or ten years. Moreover, you also need to assess how consistent the return is comparatively to similar funds, as well as to the overall market.
3. Evaluate your manager’s track record. Check the track record of your fund’s manager. Pick a manager with experience of five years or more who has worked on a particular fund, follows a consistent strategy, and has delivered impressive returns for long periods.
4. Develop automatic plans. Set up a mutual fund using an automatic plan with your fund company or employer. If you can, use your 401(k) plan to have automatic deductions on your paycheck before taxes.
5. Monitor your fund's performance. Monitor your mutual fund’s performance monthly, or at the least, quarterly. This will enable you to make decisions such as whether to increase your investment or to sell. Compare your fund’s performance with other funds as well as with the overall market.
6. Diversify. One of the most attractive features of mutual funds is that they are usually diversified. Based on economic and historical data, it is wisest to diversify by using asset allocation (as stocks, bonds, and cash equivalents).
