The advantages of investing in a mutual fund over trying to pick individual stocks is something we have all heard of. First of all, professional analysts that devout many hours of study to the various stocks and are also known as market experts are hired by mutual funds. To study the financial reports, you need to devout a large portion of your free time and unless you are willing to do this, then you won't have as much information to make a decision as a mutual fund manager.
Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Simply put, there are those that go up and those that go down and combined, the return levels off the risks or fluctuations.
Because of mutual fund, rather than having to save a large chunk of cash to purchase 100 shares of stock, smaller investors are offered a chance to invest in small increments.
Given the above advantages, it's no wonder that mutual funds have become a very popular form of investing. But how does one make a selection since there are about thousands of mutual funds to choose from? Here are a few tips:
You need to avoid being talked into jumping on the recently performing best fund. This may seem like safe and rational but just like individual stocks, what you want to do is buy low and sell high and not buy high and pray for more growth.
Even good funds may not be able to overcome the force of the overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Carefully read the prospectus in order to understand what these are.
Make sure that the number of funds that you own are limited. Diversifying into many mutual funds will not increase your return by much nor will it reduce your risk unless you are trying to simply achieve the same returns as the broad market.
Tending to slip in performance are funds that have become too popular and too big. There are several reasons for this.
There is one final point that you need to remember and that is the type of fund being totally dependent on your investment objectives. Whether they are for retirement, income, growth, funding the kids college, etc., there are certain funds that are designed for your objectives.
Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Simply put, there are those that go up and those that go down and combined, the return levels off the risks or fluctuations.
Because of mutual fund, rather than having to save a large chunk of cash to purchase 100 shares of stock, smaller investors are offered a chance to invest in small increments.
Given the above advantages, it's no wonder that mutual funds have become a very popular form of investing. But how does one make a selection since there are about thousands of mutual funds to choose from? Here are a few tips:
You need to avoid being talked into jumping on the recently performing best fund. This may seem like safe and rational but just like individual stocks, what you want to do is buy low and sell high and not buy high and pray for more growth.
Even good funds may not be able to overcome the force of the overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Carefully read the prospectus in order to understand what these are.
Make sure that the number of funds that you own are limited. Diversifying into many mutual funds will not increase your return by much nor will it reduce your risk unless you are trying to simply achieve the same returns as the broad market.
Tending to slip in performance are funds that have become too popular and too big. There are several reasons for this.
There is one final point that you need to remember and that is the type of fund being totally dependent on your investment objectives. Whether they are for retirement, income, growth, funding the kids college, etc., there are certain funds that are designed for your objectives.
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