Are you planning about investing in a mutual fund, but you are not sure how to go about it or which fund is the most suitable based on your needs? You are not alone. However, what you might not know is that selecting a mutual fund is much convenient than you think. Of course, once you have some understanding of the concept you can make choices for yourself and that too good ones.
Identify the goals and danger Tolerance
Before you invest in any type of fund, you must first identify your aims for the money getting invested. Do you have objectives that are long-term capital advances, or are present income important? Will the cash be used to pay for college expenses, or to fund the retirement that is decades away? Recognizing a goal is a significant step in carving down the universe of more than eight thousand mutual funds available to investors.
Apart from this you must also take into consideration the personal risk tolerance. Can you accept intense swings in portfolio value? Or, is a more traditional investment more suitable? Risk and return are directly relative and you must balance your desire for returns against your capability to tolerate risk. After all, once you know How to choose mutual funds you would be able to make the best choices.
Eventually, desired time horizon has to be addressed. How long would you like to hold your investment? Do you anticipate any type of liquidity concerns in the near future? Mutual funds have sales charges and it can take a big bite out of your return over short span of time. To mitigate the influence of these charges, an investment horizon of at least five years is perfect. So, make sure that you have kept this thing in mind.
Fund Type and style
The main goal for growth funds is appreciation of the capital. So in case you plan to invest to fulfil a longer-term need and can deal with a fair amount of risk and volatility, a long-term capital appreciation fund could be a good choice. These funds characteristically hold a high percentage of their assets in common stocks and are, therefore, believed to be volatile in nature. Having the higher level of risk, they cater the potential for huger returns over time. The time frame for holding this kind of mutual fund has to be five to ten years at least.
Remember that Growth or capital appreciation funds usually do not pay any dividends. So, in case you need current income from your portfolio, an income fund could be a better choice. These funds generally buy bonds and other debt instruments that pay interest frequently. Government bonds and corporate debt are two more common holdings in that of an income fund. Bond funds often thin their scope in terms of the category of bonds they keep. Funds could also differentiate themselves by time horizons like that of short, medium or long term.
Thus, once you have basic understanding of different funds and the consequences you would be able to make a better choice. Basic understanding will save you from making mistakes.