How To Find The Best Mutual Funds To Buy

Reviewed: June 26, 2014
By FinanceWeb

A mutual fund is a collection of securities that is managed by an individual or group, and then sold as shares. For example, an investment firm may create a mutual fund based on European retail stocks and then sell shares of that fund to investors. When an investor buys into a mutual fund, that investor shares in the profits and losses of the entire fund. The investor does not manage any of the fund transactions as a small portion of the fund proceeds go to managing the fund.

When it comes to finding the best mutual funds to buy, it all depends on what you are looking to invest in. There are mutual funds that deal in stocks, there are funds that are comprised of bonds, and there are funds that have a wide variety and mix of securities. You can choose a fund that is aggressive with its approach, or you can decide to choose a fund that has a long history of low, but reliable, earning.

The Risks Of Mutual Funds

The biggest risk with a mutual fund is that you could lose some or all of your money. For some people, the frustration associated with losing money in a mutual fund is compounded by the fact that the investor has no say in what kind of buying or selling activity the fund engages in.

Because it is comprised of securities sold on the markets, a mutual fund has the same risks as any other stock or bond. If the value of a stock plummets, then the mutual fund could be stuck with that stock because there are no interested buyers. If a bond issuer cannot repay their obligation, then the investment could wind up being worth nothing.

Benefits Of Mutual Funds

Mutual funds base their earnings on a broad range of securities. This means that, if one security fails, the mutual fund can still post a profit based on the activity of the other securities in the portfolio.

A mutual fund is not usually tied to any one security or set of securities. If the fund manager sees a particular stock or bond as being too risky, then that security can be sold off to protect the income generating ability of the fund.

Choosing The Best Mutual Fund For You

The best mutual funds to buy completely depend on what you want to get out of your investment. Every mutual fund offers a prospectus that outlines the fund’s investment strategy and past performance. You cannot predict future performance based on past performance, but you can use past performance to determine how successfully the fund has been managed.

Each investor has a different goal and a different tolerance for losses. If you are an aggressive investor who wants to make a large gain now, then you would choose a more aggressive mutual fund. If you want to get involved in a fund that has long-term potential for increased income, then you want a fund that has shown a consistent pattern of growth. The investors who have a hard time dealing with losing money will look to more stable mutual funds that have a long history of low, but reliable returns.

Some investors try a mix of aggressive and passive mutual fund investing because it provides stability and growth. The danger is that the aggressive growth fund could start to lose money and that would undermine the stability of the entire portfolio, but that is one of the risks involved with any kind of aggressive investing strategy.

Mutual funds are popular because they are not tied to any one individual security. Many investors like the idea of having their risk spread out over several securities because it helps to reduce the possibility of financial loss. But mutual funds, like any other investment, can lose money as easily as they make money. The secret is to find the combination of mutual fund investments that you feel comfortable with, and can generate you the kind of income you are looking for.