Coming down to a decision of which mutual fund to buy is usually the hardest decision. After all, every fund will market itself in an irresistible way. The real key is to have a good system in place to sift out the funds that are not suitable for your investing philosophy and to evaluate the potential of the fund.
Finding funds is becoming increasingly easy today. Almost every fund has its own website and you simply need to do a quick google search to be able to go through a large list of mutual funds out there. Another good tool you can use is Morningstar, which holds extensive information and analyst reviews on the various mutual funds in the market.
When choosing a mutual fund, the most important things to consider are actually your appetite for risk, and your investment goals.
As we have discussed in an earlier chapter, the difference that separates the different types of mutual fund is really the level of risk and the level of potential return that comes with it. You also need to ensure that your investment fits with your investment goals. For example, if you can only afford to park your money in a mutual fund for a couple of months, you might want to go for money market funds.
Ask yourself the following questions:
1. Can you afford to lose money when the stock market turns? When the stock market turns, it is highly likely that your fund will perform even worse than the market.
2. Can you afford to have money tied up in a mutual fund for the long term? If you are heavily invested in stocks, it might take years before your value investing strategies start to see results, can you allow that amount of money to be tied to the shares? If you cash them out before the time comes, you only end up paying more money in commission.
3. Are you comfortable with the fees that the fund managers are charging? Certain people do not like to pay for expensive fund managers. Example 1% maintenance fee of $100million fund is $1million dollars, so are you ready to pay a premium?
4. Are you a passive or active investor? We will actually go through this in a later chapter.
5. What are your investment goals? Are you trying to beat the market consistently? If you are, then chances are you might have to fork out a premium for your mutual fund.
6. How much money do you have to put into a fund? Do you have any tax concerns?
Take some time and really answer these questions because they are closely related to what kind of mutual funds you can pick.