If done correctly, mutual funds can be a very good investment to achieve your financial goals. There is no such thing as a bad time in investing in a mutual fund but only bad choices. So here is a short guide of do’s and don’ts in choosing the best mutual fund for you.
Here are my do’s..
Do know your investment objectives and risk tolerance and pick the fund that meets these.
- This objective can be for current income, appreciation, capital preservation, or a combination thereof. If you have two or more, you need to prioritize this. Understand your risk tolerance level. Although you choose an aggressive growth fund because of high return, this may be inappropriate for your risk tolerance. A good way of measuring your risk tolerance is determining how much you are willing to lose. Whatever that amount is, more or less, that should be the return that you can expect.
Do know your time horizon.
- More aggressive funds are best kept at least for five years. If your time horizon is less than this, it’s best to just stick with money market or bond funds.
Do always read the prospectus before investing.
- Everything you need to know about the fund is in the prospectus. The fund objectives, fund managers, officers and directors, all costs and fees associated with the fund as well as the past performance are some of the information stated in the prospectus.
Do pick a fund and/or an investment company with a proven track record and know who the fund managers are.
- Focus on how they managed volatility and not just performance or return. An equity fund with a higher volatility may just mean funds may be invested in higher risk investments such that you can lose more in a bad market.
Do understand the fees and costs.
- Some fees may be one-time like the sales charge or exit fee but some are charged regularly or annually like the management fee. This can range from 0.25% to as high as 3%. These charges greatly impact your overall return. If your annual management fee is 2% and your fund earned 4%, this means that your net return will only be 2%.
Do invest in two or three funds for diversification.
- As a starter, invest in more conservative funds like money market funds or bond funds and later go into more aggressive funds that have an equity component as you get more experience and increase your wealth.
Now for my don’ts.
Don’t trade your fund.
- A lot of people get excited and sell even if the value goes up a little and panic when the value goes down. It is the fund manager’s job to buy and sell at the best time and not yours. The worst thing that can happen to you is selling at lows and buying at highs.
Don’t look at your fund value everyday.
- I am not to say that you should not monitor your fund but you don’t need to do it everyday. This will remove the temptation for you to sell your fund prematurely. A monthly review is more than enough unless there is a catastrophic event that happened in the market. Rebalancing of your portfolio can be done once a year.
Don’t exclude funds outside of the broad three funds.
- There are a lot of funds with new features that are very innovative and that can greatly reduce your risk. People generally just stick to bonds, equity fund and the mixture of both. Money market funds, index fund and structure notes laced funds can be a good addition to your portfolio.
Don ‘t stop!
- The best tool in achieving your goal is consistency. A lot of funds now offer regular or scheduled savings schemes. Some banks even go to the extent of linking to your savings account for automatic transfer to your fund on a monthly basis.
- Remember, the correct formula for investing is EARNINGS – INVESTMENT = EXPENSES rather than EARNINGS – EXPENSES = INVESTMENT.
Don’t limit yourself to just mutual funds.
- A mutual fund is a fantastic tool but it is just one of the many that you should consider. A unit investment trust fund and variable universal life insurance can provide advantages that may fit your requirements.
Lastly, don’t self-medicate.
- You go to the doctor if you don’t feel well and you talk to a lawyer if you need legal advice. Why are you not treating your challenges in financial planning the same way? Seek for a reputable financial planner. They will be more than happy to help you out.
Happy wealthy living!