I believe mutual funds are one of the best investment vehicles and therefore should be a part in virtually every retirement plan. With mutual funds, you get the benefit of professional management. Some of the best minds on Wall Street handle the difficult job of selecting investments for the fund you’ve chosen while you’re at work or play.
You also get diversification. Many times 100 stocks or more are included in one fund. The main disadvantage to a mutual fund, of course, is that there is no guaranteed return. Mutual funds can increase or decrease in value due to fluctuations in the market, meaning you could either make money or lose it. Unlike a savings account or a CD with a major bank, there is no FDIC insurance to cover your losses.
However, for an investment to have a chance of out-pacing inflation, it can’t be tied to any particular fixed rate of return, like federally insured CDs and savings accounts. CDs and savings accounts play a role in retirement planning, but not as wealth-building vehicles.
It’s not my intention to give you all the information you might need regarding mutual fund investing, because there is more to that than I can cover in this post. But I can give you some simple guidelines for researching mutual funds. These tips will give you a jumping-off point to do your own research and to know which questions to ask if you use a financial advisor.
You will want to evaluate the track record, management team and categories of stocks within the fund. First, look at the fund’s previous track record, meaning how the fund has performed over the last one, three and five years. Sometimes a 10-year history is available, but many times that history isn’t helpful because so many variables could have changed over the years.
Keep in mind, even though past performance doesn’t guarantee future results, it will give you an idea whether the fund manager knows how to maximize returns. Whether he or she can do it again is another story, but at least you know whether the manager has traveled that road in the past. Also, when you check the track record of a particular fund, make sure that the fund manager who was responsible for those returns is still in charge. If not, you would have no way of evaluating the fund’s long-term management.
Next, evaluate the fees. There are a variety of charges associated with mutual funds. Commissions, marketing charges, and fees due upon sale, are just some the things you will want to research. Obviously, the more charges you pay, the more your return is reduced. Be sure to check the prospectus of each fund to see which charges apply.
Next, evaluate the risk factors. It’s also important to look at a fund’s risk category. Most fund families categorize their funds as low, medium or high risk.
Again, this information is really just scratching the surface of what you need to know to make an intelligent decision. So, don’t invest without first doing your homework and get your investment advice from a qualified financial advisor. Lastly, never invest in anything you don’t fully understand. Being in a hurry to invest can get you into trouble.