Mutual funds are beneficial in that they can diversify your investments. This limits your risk of losing money due to one company’s failings.

At the same time, knowing which mutual fund to choose can be overwhelming, especially if this is your first time choosing one. To help you with this, here are some factors to consider:

Fitting Into Your Investment Profile

The first step is to consider how the mutual fund fits into your overall financial profile. Your financial profile includes the goals you want to set such as saving for college or retirement.

As part of your financial overview, you’ll want to determine your risk tolerance. For some, this could mean being aggressive in investment strategies with the understanding they could lose money by doing so.

Whereas for others, you might be more inclined to play it safe with minimal risk. This streamlined approach helps you to earn money at a steadier rate. And while there will be some fluctuations, playing it safe allows you to weather those storms with fewer losses.

This is important to decide because when you meet with your broker or investment company, your risk profile along with your financial goals shape your investment strategy.

Measure the Fund’s Performance

The tricky thing about investing is past performance doesn’t always equate to future success. However, there are some things you can examine to determine how the mutual fund might perform moving forward.

The first is to see its Morningstar risk rating. Morningstar assigns ratings for each mutual fund from one star (which is poor) to five stars (being the best.) This rating can help you weed out mutual funds that have earned lower ratings continually.

One aspect of Morningstar’s rating that’s really beneficial is a mutual fund’s expense ratio. The expense ratio is the operational costs of the fund. According to Morningstar, this is ratio is a great predictor in future behaviors because it measures absolute returns and the future risk-adjusted return with comparable mutual funds. So you gain a side-by-side comparison of which mutual funds perform better long term.

Speaking of past behavior, you can whittle down mutual funds based on their performances over the course of their history. To demonstrate, if a mutual fund has performed poorly since its inception then it’s wise to stay away from it since it could indicate the company might close.

Another factor is the mutual fund’s volatility as it relates to your risk tolerance. If a mutual fund goes through varying periods of aggressive growth then diminishing returns, it signifies a higher risk. And depending on how you fall on the risk tolerance spectrum, its volatility could place it out of contention.

Costs Associated with the Mutual Fund

When you choose a mutual fund, costs should play a pivotal role in determining which fund you select. In some instances, you’ll pay transaction fees (also known as loads.) These loads will eat into the money you initially invested.

That said, there are other mutual funds that won’t charge you for a transaction fee. Instead, they charge ongoing fees that could result in you paying more than you would for a fund with loads. Therefore, it’s ideal to understand the total costs of the fees before choosing the fund.

Another way to plan for retirement is to meet with an independent Cole Harrison agent. Our agents can help to ensure you have the right insurance policies to meet your long-term goals.

Recent Posts