Just a few days ago, one of our writers wrote about whether we should choose mutual funds or exchange traded funds (ETFs). If you have not read the article yet, we suggest for you to read it first.
If you decide that you are still keen to invest via a mutual fund, here are some information you would need to know.
Investing in mutual funds
Once we reach a certain number of working years, most people inevitably start to ponder about investing and growing their money quicker. A mutual fund is a possible option to grow your money. However, what most people fail to realize is that even though a mutual fund allows them to take a “hands-off” approach towards investing, they still need the right knowledge to be able to choose the right mutual funds for themselves.
In today’s article, we are going to highlight 3 things you need to know on how to identify your needs and pick the right mutual fund.
1. Determine Financial Goals and Risk Profile
Before starting any type of investment, one should always identify his or her goals, risk tolerance and time horizon. Some typical questions to ask are:
- Are you going for long-term growth, or do you desire a steady payout to complement your current income?
- Are you investing money that needs to be used within 10 years or less? Or are you investing money to supplement a retirement portfolio that is still decades away?
- How much volatility can you handle? In other words, how much loss can you stomach before you have trouble sleeping at night?
Identifying all the above from the onset is crucial to filter out the thousands of mutual funds that don’t fall under what you are looking for. Remember, you are picking what suits you. Not what suits the person who is trying to sell you the mutual fund(s).
2. Style and Fund Type
There are tons of funds out there for many different types of investors. A quick check on Fundsupermart.com (a unit trust platform) reveals over 950 funds from more than 80 fund managers.
Growth funds usually hold a higher percentage of their assets in common stocks and are, therefore, considered to be volatile in nature. They also carry the potential for a larger upside in the long run.
In contrast, conservative investors can go for bond funds as they give out regular distributions as income. These funds are generally less volatile too.
The important thing to do is not to select a fund based on how well they have performed over the past few years, but instead, to choose a fund which complements your needs.
3. Key considerations to take note
Apart from selecting the fund that matches your investment strategy, there are some general ground rules for investors to take note of which are highlighted below:
- Superior long-term performance of the funds
- Least possible expense ratio – Lower costs usually means higher profits, with all things being equal
- Management with long tenure – a fund manager who can produce high returns over a period of 10 years would have a slightly better chance of doing it again for another decade
In short, you should single out funds which have delivered consistent, above-average results with an experienced fund manager at the helm. It may increase your odds in getting the better results with minimal uncertainty as long as the fund manager continues to do what he is best at – making your hard-earned money grow.
The Bottom Line
Selecting a mutual fund may seem like an intimidating task, but knowing your goals and risk tolerance is half the battle won. Finding a professional for help will help you to achieve what you set out to do in due course.