Six Tips For Smart Mutual Fund Shopping

Picking the right mutual fund is more complicated than looking at fees, expenses and past returns. Some people are likely to spend more time analyzing a new business suit purchase than their next investment. Chuck Jaffe with Marketwatch has outlined six key tips that will ensure you choose the right fund every time.

  1. Material/fabric and cut - Like buying clothing, each fund is made up of different components and has a specific style. While every fund company may have a growth or an income fund, they are likely built of different individual components. Make sure you look at the specific holdings of the funds you are considering to understand what it is made out of and what its objective is.
  2. Durability - When purchasing a nice piece of clothing you want to know how well it will hold up over time. The same goes for a fund. You can check the past performance with benchmarks and how it has faired during known downturns.
  3. Need or Desire - You need to make sure that each fund in your portfolio has a need and is not there simply because it is trendy. Analyze your portfolio for gaps or overweight areas and address those issues first.
  4. Size and Fit - This goes along with need and desire as well, but it is important to make sure that your new purchase has a place in your portfolio and for your investment objective. Be careful that you you avoid overlap, as owning just a few different equity funds may result in excessive overlap that does not necessarily diversify your holdings.
  5. Price - We all know to evaluate fees and expenses, but one issue many people overlook when evaluating a new investment is what the minimum amount to invest is. When running screens or filters on websites make sure to filter out funds with high minimums that are out of your current price range. If you have $5,000 to put towards a new fund it doesn’t help you look at the fund universe that includes funds with $10,000 or $25,000 minimums, you will just waste time.
  6. Brand Name - Typically we find a specific brand of clothing that we like and we stick with it. This can be good because we know what to expect, but it can also mean missed opportunities. The same goes for your fund holdings. Don’t be afraid to look at other companies. You may have some great experiences with XYZ fund company, but at least take a look at what other companies are offering and see if there are additional opportunities available. This is especially true for people who specifically deal with no-load funds since there is generally no incentive to hold only one company’s funds. The opposite is true if you own A-shares of a load fund because there are breakpoints that may be available by owning a certain dollar amount of funds within their company.

When you are deciding on a new fund to purchase, make sure you look at more than returns and expenses as there are many important factors to consider when it comes to your investments. If you would like more information on these tips you can check out the original article on Marketwatch.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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