The Best Way to Evaluate Mutual Fund Choices

Choose the right mutual funds for your needs.
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Investing in mutual funds can be an excellent way to build a nest egg and secure your financial future. But not all mutual funds are the same, and it is important to evaluate each mutual fund carefully. Considering a number of factors, from the long-term and short-term performance of the fund to the fees and expenses it charges, will help you find the best mutual fund for your particular situation.

Step 1

Request a prospectus for each fund you are considering. Review each prospectus to become familiar with the format and layout of the document. You can often find fund prospectuses in electronic format on the mutual fund company's website. Call the company and request a hard copy prospectus if an electronic version is not available.

Step 2

Turn to the front of the prospectus and find the performance numbers for the fund. The prospectus will list the fund's performance over a number of different time periods, from the last three months to the performance since the fund's inception.

Step 3

Watch out for newly-established funds with extremely good performance over their short life. The Securities and Exchange Commission warns that new funds with relatively low asset levels often experience very high returns in the early years, only to revert to lower returns as they mature.

Step 4

Check the fees and expenses for each fund. High fees can really eat into the return you see in your pocket. A study posted on the Motley Fool website found that index funds have expenses as low as 0.18 percent, compared to well over one percent for many managed mutual funds.

Step 5

Find the turnover ratio as listed in the prospectus. Funds with a high turnover ratio often have higher trading costs and generate higher levels of capital gains than those with lower turnover.

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