Mutual Fund Investment Tips

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Mutual Fund Investment Tips

AMutual fund is a form of collective investment that poolsmoney from many investors and invests the money in stocks, bonds, short-termmoney market instruments, and / or other securities. In a mutual fund,the fund manager trades the fund's underlying securities, realizingcapital gains or loss, and collects the dividend or interest income. Theinvestment proceeds are then passed along to the individual investors.

There are many mutual funds in the market. While choosing a mutual fund, you need to remember that if the fund had yielded superlative returns in the past, there is no guarantee that it would continue to do so in the future. This is especially true of new or small funds. The other factors that can affect the performance of your investment significantly are:

Last Updated - 29th July 2006

Sales charges, fees and other expenses levied by the fund

Taxes to be paid on receipt of distribution

Duration of operation and size

Risks and volatility

Alterationsin the operations

Here are some tips to make your investment in mutual fund safe andprofitable:

For their regular operations, the funds charge fees and expenses tothe investors. As an investor, you have to bear the costs of advertising,research and fund manager’s fees. If the costs of funds are high, itshould give better results than the low-cost funds. A small differencein costs over a period of time can become a big difference in returns.Use a mutual fund calculator to calculate how the costs of various mutualfunds accumulate, reducing your returns.

Check out the impact of the fund on your tax liability: Accordingto the law, you have to pay capital gains tax if the fund sells anystock to make a profit which cannot be offset against a loss and distributesit to the shareholders. This holds true even if the performance of thefund has been poor. To minimize paying the tax, talk to the fund whenit is about to distribute the profit. You can also find out the informationfrom their websites.

Consider the duration of operation and size of the fund: Findout how long the fund has been in operation and the corpus of fundsmanaged by it. New or small funds can yield excellent gains in the short-term.Since these funds invest in a few successful stocks, it can reflectin the fund’s performance. When these funds start growing and investin more stocks, the impact of each stock on the fund’s performance lessens.This makes repeating the initial spectacular performance difficult.Take a look at how the fund has performed over a long time (minimumperiod of 5 years) and how it has handled the fluctuations in the stockmarket.

Determine the volatility of fund: Though it is truethat past performance of the fund need not determine the future,you can gauge how volatile the fund has been. High volatility fundscarry high investment risk. If your aim is to invest money for yourcollege education in a year time, do not choose these funds. They willnot only fail to meet your needs but may also cause loss of capital.The prospectus and annual report for the fund will give you an ideaof the fund’s volatility. If the fund has generated spectacular returnsfor a few years and then dismal returns for the next few years, thenit is a highly volatile fund.

Take into consideration the risks taken by the fund to generatethe return: All mutual funds carry some amount of risk. Even thefunds that invest in the bonds and other debt instruments that are low-riskstill have to face the risk of change in interest rates. Funds generatinghigher returns are more likely to take risks that you may not be comfortablewith and may not match your financial goals. E.g. fund that investsmainly in technology stocks or small company stocks take higher risk.If you are investing in the fund for a short-term goal like going ona vacation, these risky funds may not meet it. To decide on the bestfund, plan out your long-term strategy and decide your appetite forrisk.

Question any changes in the fund’s operations: Many changescan happen in the mutual fund industry. The old fund manager may leaveor the strategy may leave. The fund can merge with other fund. Findout the reason behind this. Changes like these can affect the futureperformance of the fund.

Find out the services offered and fees charged by fund: Findout the services offered by the fund and the fees charged by it. Thesedetails are mentioned in the offer document. Certain funds offer toll-freetelephone numbers, check-writing facilities and automatic investmentprograms. Find out the ease with which you can trade in shares of thefund. Determine if the fund charges you for trading in shares. The fundslike international funds or small companies funds need extra researchfrom experts and hence charge higher.

Determine the impact of diversification on your portfolio: Thesuccess of your investments will be decided by the money you have distributedamong various asset classes: stocks, bonds, and cash. While investingin the mutual fund, determine how investing that fund will impact theoverall diversification of your portfolio. Try to keep your portfoliodiversified and balanced to reduce the level of risk.

Disclaimer: The Mutual Fund Investment Tips /Information presented and opinions expressed herein are those of theauthors and do not necessarily represent the views of TipsAndTreats.com and/or its partners.

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