Households around the world are turning to mutual funds as their investment of choice more than ever before. Even company-sponsored retirement plans utilize mutual funds to maximize their employees' retirement income. Simply understanding mutual funds, however, is not enough to make an informed decision about where to entrust your money. Knowing how to select the best mutual fund out of the thousands of available choices is key to making the right call.
Analyze funds' long-term trends and performance metrics. Visit the FINRA Fund Analyzer by following the link at the end of this article to access a range of information on virtually any mutual fund. The fund analyzer provides charts of fund values over time, as well as detailing the profits or losses made each year throughout the fund's life.
Select a fund that matches your risk profile and objectives. Value funds provide reasonable returns with relatively low risk. More aggressive funds can provide much higher returns, but with a higher risk of loss. Value funds fill their portfolios with established, trusted organizations whose stock price reliably and steadily grows over time. Aggressive funds hold stocks of newer companies on the rise in their industry, or companies in emerging industries, as well as other speculative plays. If you wish to receive profits from a fund in a relatively short period of time, consider seeking a more aggressive fund.
Analyze the individual holdings of funds if possible, and compare holdings against other funds. Mutual funds do not have to work like a Pandora's box to investors. Tools such as Morningstar's Instant X-Ray can quickly show you what type of companies and industries the fund is exposed to, as well as the geographic regions that it favors and select performance metrics.
Read up on fund managers' experience and track records. Look for funds with managers who have worked with reputable investment firms in the past, or who have managed their own financial advisory firm for some time. Find a fund with a manager willing to speak or meet with individual clients to answer questions.
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