Mutual Fund Checklist

Trust solid research more than gut feelings when choosing mutual funds.

Trust solid research more than gut feelings when choosing mutual funds.

With so many mutual funds on the market, you need a way to narrow down your choices. By creating a checklist of things to look into about mutual funds, you can focus on the ones that best suit your needs. Once you get in the habit of using a checklist, you can apply it to any mutual fund for your future investing.

Read Prospectus

The first thing you should do with any fund is read the prospectus. Every mutual fund has a prospectus. This is a document that contains details about what the fund invests in as well as its management's objective, fees and past performance. You can download the prospectus for free from the mutual fund's website. Each fund is required to send you a prospectus once you invest, but that's really too late. You need to read it before you invest.

Check Loads and Fees

Mutual funds charge for their services. Some will charge you a fee up front when you invest, while others have a deferred sales charge that is levied when you sell your shares. All mutual funds charge management fees, which go to the money managers and to pay other operational costs. This information is contained in the prospectus. Write down all of the fees for each fund you are looking into.

Evaluate Past Performance

You can look at how well a mutual fund has done by going into financial websites such as Yahoo Finance or Google Finance. Each mutual fund has a symbol, which you will find in the prospectus. This is usually an abbreviation that represents the fund's name. Enter the symbol into the "Get Quote" field and you will be taken to a page that shows the current share price of the fund as well as a chart. These sites also offer a summary of the fund's performance over one to 10 years. For example, you may read that a fund has made 7 percent per year on average. Note that past performance doesn't indicate how well the fund will do in the future. It's just a rough guide for you.

Analyze Holdings

A prospectus will tell you what the fund is invested in. For example, if it's a stock fund, you'll see a list of all the stocks the fund owns. If it's a bond fund, you'll see a list of government and corporate bonds the fund has bought. Financial sites list the top 10 holdings for each fund. Make sure the fund invests in a type of security you want to be involved with. A fund can buy and sell securities at will, so its current holdings may not be identical to the list in the prospectus or the lists on financial sites.

Understand Objectives

Every fund has an investment objective. For example, some invest to produce income through dividends or bond interest payments. Others invest for growth by buying stocks they think will go up in value. Still others may adopt a combination approach and invest for growth and income. This is where you can really narrow down the field. Decide what your objectives are and insist on a fund whose objectives are the same.

Check Tenure of Fund Manager

The fund manager is the heart of a mutual fund. This is the person who makes buying and selling decisions for the mutual fund. The prospectus will tell you how long that manager has been in place. A manager with a long tenure may have kept the job by doing well. A new manager may not have been tested yet. If the prospectus is a month or two old, check your financial sites to see if there's any news about your mutual fund regarding a new manager. It's up to you to determine how important this factor is to you, but a manager with a long track record may provide the most stability.

About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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