The best ways to choose mutual funds – Part 1

If you want to invest in mutual funds but you don’t know where to begin you’re not alone. With nearly 8000 different types of mutual funds that can be purchased either from a mutual fund firm, through some type of financial advisor, directly by the consumer or at a brokerage firm, the choice can be quite difficult and daunting. When you include all of the different types of share classes the number of mutual funds actually rises to just over 22,600 different kinds. It’s for this reason that we put together a small blog about some of the best ways to choose mutual funds. We hope this advice will be valuable in your search for the mutual funds that are best for your financial situation. Enjoy.

Lydia Sheckels, the chief investment officer at Wescott Financial Advisory Group in Philadelphia, PA  advises that people looking for mutual funds should definitely not be like the typical shopper who heads to their local grocery store without a list. What she is alluding to is that the typical mutual fund investor is much like a person without a shopping list who goes up and down the grocery store aisles trying to figure out exactly what they want to purchase. It might work for groceries but it’s not exactly a great idea went shopping for mutual funds. Better, she says, to know exactly what you’re looking for because if you don’t you will more than likely choose a mutual fund based on its latest performance, a factor that could very well change for the worse in the years to come.

Anyone who’s interested in investing in mutual funds should also take an honest account of the type of investor that they are. A conservative investor may not be able to deal with the fact that a fund can wildly go up and down in value whereas a more aggressive investor might be willing to tolerate this volatility as long as the manager of the fund is capable of generating excellent long-term returns.  There are also certain companies that some people may not wish to invest in due to moral or ethical reasons and those reasons should be kept in mind when investing.

It is believed that investment allocation is the  biggest determinant of a portfolio’s performance and accounts for over 94% of its return. It is for this reason that it is a good idea to have several different types of mutual funds in your portfolio. For example, there are many different types of asset classes that are represented by mutual funds and they all can perform differently. Having several different types, just like having several different investment vehicles in your portfolio, will help you will to protect your investment against losses.

It is also a good idea to become familiar with the different types of fund styles.  Mutual funds can be classified according to their investment style, the size of the companies that they contain and so forth. There are also small-cap, medium-cap, large-cap, value, growth and blend funds and you would do well to know which type that you want and how many before you make any purchase decisions.

Since we all know that past performance is not a guarantee of future results, any past performance that you see touted by a mutual fund should of course be regarded with at least a small grain of salt. There are many financial experts who believe that fund rating systems that rely on past performance to determine future gains are not useful at all because of the  cyclical nature of mutual funds.

Of course as with any investment vehicle you would do well to do as much research into a particular mutual fund as possible, ask opinions from experienced financial advisors who specialize in mutual funds and use the regular amount of caution when making your investments. And, as with all investments, your best bet to come out ahead is to hold onto your mutual funds for as long as possible.

There’s much more to come so please make sure to come back soon and join us for Part 2. See you then.

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