It can be very exciting and enthralling to invest in a mutual or hedge fund. It can almost feel like being inviting to an exclusive club that you know about but that others are left out of. In all of that excitement, it is easy to forget about the very basics of investing in general. You simply cannot allow that to happen to you. Check your head and make sure you know what you are doing before handing over even a single dollar of your money to any investment manager.
1) Who Is The Fund’s Manager?
Would you really just trust your money with anyone? Hopefully not. You have to think about the possibility that someone does not have your best interests at heart. They may be out to scam you, or at the very least they may want to take more money off the top of the investments than what is really necessary. This is not to say that all managers are fraudsters like this, in fact the vast majority are not. However, it is always a smart idea to check into the management of the fund before putting any money into it.
2) Checking On The Fee Structure
The fee structure for a fund is another element to inspect while checking out the management of the fund. It is important to know both what you are paying to invest in the fund as well as how the management of the fund is compensated for their work. It is easy to hear a low fee number and think that it is not a big deal, but consider how quickly even a small percentage of money can add up over a long period of time.
There are easy to use online fee calculators such as the one at Bankrate.com which allow any investor to quickly see the impact of fees on their portfolio in the long run. Just plug a few numbers in their and get the result. Just be warned, the results may surprise you.
3) Different Types Of Funds
The mostly commonly thought of mutual fund is a US equity based fund. This is a mutual fund which holds a variety of US stocks, often of some of the most popular companies in America. However, this is perhaps the most vanilla or bland type of fund out there. These days, there are many varieties of funds that one may choose from. A sampling of the choices available are as follows:
- Gold Mutual Funds
- International Mutual Funds
- ETF Mutual Funds
- Inverse Market Mutual Funds
- Bond Mutual Funds
Each of these types of funds is different from the standard equities mutual funds that we often think of, and each serves its own purpose. Investors may be wise to diversify their holdings among these various types of funds depending upon their investment goals and market conditions.
4) A Fund’s Track Record
They always say that “past performance does not guarantee future results” and this is true. However, the only thing we can look at to get some idea of future results is what has happened in the past. While it is not a guarantee of what will happen going forward, it is at very least an indication of what may take place going forward.
Investors typically want a fund that at least holds up to the market’s average returns over a long period of time. A mutual fund that has produced 10% or better annual returns over a period of at least ten years would be considered a strong performer. A fund that produces a 7% or lower annual return is probably something to be avoided. Always factor in the cost of fees on those returns as well to get the most accurate number possible.
5) Avoiding The Hype Machine
Finally, every prudent investor must check themselves to make sure they are staying in line when it comes to follow the hype. In other words, we are all potential victims of an over-hyped fund if we allow ourselves to get roped in. We should try to do our best to check our emotions and ensure that we are investing in a fund because it is right for us financially, not just because it is being heavily promoted.