Buying a mutual fund can be a process that may seem a bit daunting to many. Just as is the case with most things in life, being armed with certain information in advance will make your decision easier. Here are ten things you should know about mutual funds.
Fees: What are the total fees associated with the fund and how are they assessed? Every mutual fund has a management fee which is a fixed percentage of the value of the assets held. This fee can range from one to two percent annually, however there may also be other fees associated with the fund. Extra fees may include administration fees, sales commissions, transaction fees, entry fees, and withdrawal fees. All of these fees can add up, so always look for the cost of total fees associated with the fund.
Minimum Investment: Some funds will accept small investment amounts, while others require investments of five or ten thousand dollars or more. There are also funds that require regular investments per month or per quarter. Always verify this information to ensure it fits within your budget.
Performance: What has the performance of the fund been? By looking at the history of the returns on investment, you can get an idea of what to expect in the future.
Managers: Who is running the fund? Get to know the people who will be handling your money and their levels of experience. These people are the ones who most impact fund performance.
Manager Strategy: Are the managers of the fund you are considering active or passive? Active managers trade regularly on their own, while passive managers tend to follow the indices. Active managers often charge higher fees, however the returns can also be higher.
Risk: What is the overall risk of the fund? Risk can be determined by looking at the market on the whole, the strategy of the manager, the specific type of fund, tax issues, or other financial issues. Many people believe the greater the risk, the greater the potential return.
Cashing Out: Can you get your money out whenever you want? Some funds do not allow withdrawals before a certain time period, and some may charge withdrawal or sales fees.
Withdrawal Penalties: Some mutual funds, in addition to fees, also charge penalties for early withdrawal. This does not apply to all funds, so be sure to do your homework.
Tax Implications: Always verify the tax responsibilities you will have by investing in a particular fund. This can add a great deal to your yearly tax bills, so check in advance to be sure you can manage the potential tax consequences.
Investment Changes: Can your investment be modified at any time? There are times when fund managers may need to change the way investments are handled, or the area they are invested in. The prospectus for the fund should explain how these changes are handled, when these changes can be made, and how investors are notified.