Tips And Treats
Mutual Fund Investment Tips
A Mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and / or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or loss, and collects the dividend or interest income. The investment 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 and profitable:
- For their regular operations, the funds charge fees and expenses to the investors. As an investor, you have to bear the costs of advertising, research and fund managerís fees. If the costs of funds are high, it should give better results than the low-cost funds. A small difference in 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 mutual funds accumulate, reducing your returns.
- Check out the impact of the fund on your tax liability: According to the law, you have to pay capital gains tax if the fund sells any stock to make a profit which cannot be offset against a loss and distributes it to the shareholders. This holds true even if the performance of the fund has been poor. To minimize paying the tax, talk to the fund when it is about to distribute the profit. You can also find out the information from their websites.
- Consider the duration of operation and size of the fund: Find out how long the fund has been in operation and the corpus of funds managed 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 reflect in the fundís performance. When these funds start growing and invest in more stocks, the impact of each stock on the fundís performance lessens. This makes repeating the initial spectacular performance difficult. Take a look at how the fund has performed over a long time (minimum period of 5 years) and how it has handled the fluctuations in the stock market.
- Determine the volatility of fund: Though it is true that past performance of the fund need not determine the future, you can gauge how volatile the fund has been. High volatility funds carry high investment risk. If your aim is to invest money for your college education in a year time, do not choose these funds. They will not 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 idea of the fundís volatility. If the fund has generated spectacular returns for a few years and then dismal returns for the next few years, then it is a highly volatile fund.
- Take into consideration the risks taken by the fund to generate the return: All mutual funds carry some amount of risk. Even the funds that invest in the bonds and other debt instruments that are low-risk still have to face the risk of change in interest rates. Funds generating higher returns are more likely to take risks that you may not be comfortable with and may not match your financial goals. E.g. fund that invests mainly in technology stocks or small company stocks take higher risk. If you are investing in the fund for a short-term goal like going on a vacation, these risky funds may not meet it. To decide on the best fund, plan out your long-term strategy and decide your appetite for risk.
- Question any changes in the fundís operations: Many changes can happen in the mutual fund industry. The old fund manager may leave or the strategy may leave. The fund can merge with other fund. Find out the reason behind this. Changes like these can affect the future performance of the fund.
- Find out the services offered and fees charged by fund: Find out the services offered by the fund and the fees charged by it. These details are mentioned in the offer document. Certain funds offer toll-free telephone numbers, check-writing facilities and automatic investment programs. Find out the ease with which you can trade in shares of the fund. Determine if the fund charges you for trading in shares. The funds like international funds or small companies funds need extra research from experts and hence charge higher.
- Determine the impact of diversification on your portfolio: The success of your investments will be decided by the money you have distributed among various asset classes: stocks, bonds, and cash. While investing in the mutual fund, determine how investing that fund will impact the overall diversification of your portfolio. Try to keep your portfolio diversified and balanced to reduce the level of risk.
Disclaimer: The Mutual Fund Investment Tips / Information presented and opinions expressed herein are those of the authors and do not necessarily represent the views of Tips And Treats . com and/or its partners.
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