November 10, 2009
Choosing the Best Mutual Fund
Mutual funds provide an excellent alternative for those who neither have the time nor the expertise to manage an investment portfolio.
A mutual fund is an intermediary platform where people pool their money and invest according to a plan. A mutual fund company is basically an investment company, which periodically launches various schemes (specific mutual funds) with a predetermined objective.
The most difficult part, however, is to choose the best mutual fund. Choose a good fund and you get a wide range of services as well as an opportunity to create wealth. Make a wrong choice and you are in for trouble.
There are hundreds of mutual fund companies that offer services for managing your money. What is encouraging is that the mutual fund industry is highly regulated and the government ensures that the investing public is well protected. Howsoever, regardless of strict regulations there is no protection against the potential of loss, which makes is imperative that you take an informed decision.
Here is some information that will help you in choosing the right mutual fund.
The first thing that you must keep in mind is already there in the prospectus that past performance is no guarantee of future returns. The sad part is that most investors tend to take this mandatory declaration as only a formality and base investment decisions on the very same basis that we are warned.
Almost all mutual funds companies offer investments in equities, bonds and other money market instruments. Each one of these has varying profit as well as risk potential and the expected returns are in direct proportion to the risk involved. Investment in equities is at the high end of risk and debt instruments at the lowest.
When you are out shopping for a mutual fund you will find funds that have a high percentage of equity investment. Among equity funds, there are also index funds which are relatively less risky. There are also bond funds that will give you steady returns.
If you have a high risk capacity then the right thing should be to invest in a fund that invests in blue chip stocks. Another strategy is to select a diversified fund that has a wide spectrum and invests in numerous sectors. A balanced fund that invests across equities, bonds and debt instruments provides an even better cushion against unacceptable losses.
Having said that, the reputation, financial strength and a good track record of the investment company is of prime importance. The expertise of the portfolio manager who actually handles and rotates the portfolio can make a lot of difference.
Pay special attention to entry load and expense ratio but do not let that be the only consideration for selecting a mutual fund. Believing what the mutual fund salesman says is true to the hilt is a wrong policy. It is your money and you should learn how to invest it. Take an informed decision based on your horizon, risk capacity and end goal. A little bit of research will go a long way and help in choosing a mutual fund that is best suited to your objective and protection of your capital.