Before you invest in mutual funds, be sure to identify your investment objective, which is the goal and time frame you have to invest. That will guide you in choosing the best funds for your purpose. In general, mutual funds are best used for time horizons of more than three years; preferably, you’ll hold them for more than 10 years. The most significant risks are likely to be your emotions, fear of loss, and desire for quick gains. Be careful of “chasing performance”—the tendency to continuously seek and buy the highest-performing funds while selling the under-performing ones. Remember that investing should not be thrilling; it should be boring. Like the old parable of the tortoise and the hare, slow and steady wins the race. Some examples to choose from are stock funds, bond funds, or money market funds. Additionally, you could invest in two stock funds, but it would be essential to ensure that each fund had different holdings. Two separate funds with the same holdings neither diversify your portfolio nor reduce risk.
Front Load: These are charged upfront (at the time of purchase) and can be up to 5% or more of the amount invested. For example, if you invest $1,000 with a 5% front load, the load amount will be $50.00; therefore, your initial investment will be $950. Back Load: These are charged only when you sell a fund. Also called “deferred sales charges,” back loads can be up to 5% and may even decline or be reduced to zero over five or more years. No Load or Load Waived: As the name implies, this category of fund expense has no front load or back load. Expense Ratio: Not all funds charge loads; however, there are underlying expenses in all mutual funds. Expense ratios can be more than 1% for stock mutual funds and are used for the ongoing management of the fund. Sometimes included in the expense ratio is an operational charge, called a “12b-1 fee,” which covers the costs of marketing and selling the mutual fund’s shares.
It is also essential to see how long the manager has been at the fund’s helm. For example, suppose you find a mutual fund with an impressive five-year return, but the manager’s time at the fund, called “manager tenure,” is only one year. This new manager was not present for that five-year performance. Approach this fund with caution, or put it on your list of funds to watch.
