How To Pick The Right Mutual Funds For You

Reviewed: November 06, 2014
By FinanceWeb

Picking the right mutual fund is an important step towards achieving investment goals. There are risks associated with every form of investment and one must assess them when making selections. There are investment opportunities that can maximize progress, and one must develop skills and tools to detect these productive investments. One basic step is the gain insights into the various types of mutual funds and the characteristics that are most consistent with one’s investment strategy.

Exchange Traded Funds

Exchange trade funds are investments based on the value of indexed stocks, commodities, or a particular group of assets. It is a form of an indexed mutual fund; however it trades like a stock on the exchange. The trading value of an ETF changes throughout each trading day. The funds base the calculation of values on ETF sales throughout the day.

Indexed Funds

This group of mutual funds tracks an index such as the S&P 500, the Russell 1000 or the Wilshire 5000. One determines the value of these funds by a daily calculation of Net Asset Value. Indexed funds offer many advantages. Passive management reduces management costs, and the overall performance of the indexed group of stocks is broad enough to mediate risks. Although some indexes focus on stock with certain characteristics such as the Russell 1000 that has stocks with the largest capitalization rates on the market.

Income Funds and Equity Funds

Income funds are a class of mutual funds that place top priority on producing a stream of income for investors; many income funds base their strategies around bonds. Some bonds have solid return rates and top ratings such as U.S. Treasury bill. Equity funds emphasize growth. They seek to build greater value and select stocks which have the potential to gain in value. While dividends and payments are important, they are not the top priority; growth is a top priority, and selections tend towards stocks with large amounts of capital assets. Investors in mutual funds that focus on equity takes a long- term view. To the extent that they wish to take the equity for other purposes, growth funds can have strong appeal to investors and sales can be quite profitable.

Blended Categories for Success

Many mutual funds strive for a balance between equity, income, and money markets. These blend funds can contribute to a broad range of investors and investment goals. The direction of the market is often unclear, and the strength of a long pattern does not guarantee that it will not change. Blend funds can hedge against uncertainty by offering advantages for many stages of the market. From bullish growth to shocking news events, blend type investments offer ways to succeed under varying conditions.

Towards a Balanced Portfolio

If mutual funds are a significant part of the investment strategy, it is important to balance the fund investments. Investors can select funds that have an attractive mix of issuing companies in the basket, but they can go further to customize and balance the investment portfolio. Since most funds permit small investments, one can spread the investment amount among mutual funds as needed to achieve investment goals. Balance is needed to minimize the effects of risk. Risk comes from many sources. For bond investments, the primary risks are interest rate changes that will exceed the long-term bond rate. While the bond investment remains safe, there is an opportunity cost. Funds tied to a long-term bond positions cannot move into higher yields associated with rising interest rates.

Finding the Right Fund

Because one can purchase mutual funds and Exchange Traded Funds in small amounts, there is less pressure when picking investments. The loss of opportunity is another matter, as growing the investment money is a primary goal. Successful investment strategies can be flexible. The market is not predictable and neither is the overall economy. Flexibility is an advantage; one must be able to move quickly as economic conditions change, and as new opportunities occur.