Investing in mutual funds is filled with opinions, perceptions, and myths. Therefore, reality get buried while the half-truth goes around the globe resulting in bad decision making among will investors. Mutual fund review agents are not immune to a mix of insights and speculation of mutual funds.
If you decide to join a mutual fund, you will be overwhelmed by the number of offers readily available at your fingertips. This makes investors to get lost making it difficult to select one that aligns with their long-term goals and risk preferences. This article courtesy of www.roboadviso.com will provide a straightforward guide to help counter such confusion which arises when buying a mutual fund. The tips are formulated into question which will help you stay on the path towards finding the investment vehicle that suits you best.
What is the expense ratio?
The expense ratio is the fee paid towards the fund management plus another cost in a mutual fund. The fund management range between 1% and 2.5%. This means if you get a return of 15%, you will get between 14% and 12.5%.
What is your goal?
This is one question that is often overlooked by investors. As a buyer, you should first address your goals. If the mutual fund of choice answers investment objectives s, risk-preferences and time horizon then you should move to next questions.
Growth is a strategy with younger and more risk-tolerant investors. Their priority is to increase the value of their investments over time. Income is a strategy that aligns with yield-starved investors and retirees whose top priority is to generate a steady income from their portfolio. Capital preservation is a strategy align with the more conservative investors who are near retirement and where they highly prioritise safeguarding their assets and stabilize their portfolio.
Who runs the fun?
Now that the list has started to become narrow, the next question is to consider who runs things, the investment vehicle. Most of the mutual funds’ performance depends on the skills of the portfolio manager in charge. However, note that more of the top managers do not stay on top for the coming years. There is a lot of inconsistency but your choice of mutual fund should have a manager that guarantee future returns.
What is in the fine print?
Those who take time and go through the fund’s prospectus find it very eye opening despite it not being a pleasant experience. A closer examination helps one to located undisclosed fee. Some of the expense barely mention but exist in a majority of mutual funds include:
Front-end load-This is a sales fee that the account holder pay in the initial investment. Some go as high as 2% of the initial investment.
Backend load-This is a cost incurred upon the sale of an investment.
12b-1- This is an ongoing fee which makes a part of fund expense ratio.
Is the fund tax-efficient?
It’s without a doubt that government tax will take a bite out of your investment. However, some fund is more tax efficient than others. Where does this originate?
Methodology-This is the investment approach used by the fund in shaping tax-efficiency. In general index based funds are more tax efficient compared to actively-managed funds.
Distribution- this is the mutual fund trading frequency which highly correlated to its methodology.
Turnover – this is the amount and type of distribution which affect tax efficiency of a fund.
Shopping for a mutual fund means encountering a tall order with offering filled with quirks and nuances. To simply this intimidating process, you need to remain within the objective and risk preferences. As an investor, you need to make savvier financial decision so take a time to get educated by doing old fashion research which is more credible.