Although investments in mutual funds offer the common man an option to invest in diversified portfolios with much lesser required investment amounts and with the help of the mutual fund's expert knowledge, they do have several pitfalls. So let us learn more on mutual funds, before we move on to mutual funds investment advice.
Mutual funds are professionally managed investment schemes and so, all trades are overseen by the funds manager and all netted amounts (whether profits or losses) are distributed to the original investors on an annual basis.
As mutual funds have professional expertise, the probability of their portfolios losing in values is less than singular investor portfolios. The expertise enables them to take on portfolios highly diversified and have no or negligible company specific or unsystematic risk. The only risks mutual funds are exposed to are market risk or the systematic risks.
Mutual funds are portfolios that have lower risks than other unhedged portfolios solely because mutual funds put in a lot of analysis onto their stock picks and come up with options that negate or reduce each other's negative attributes.
For people who are new to the stock markets or do not know the workings and the analysis that goes behind stock picks in a portfolio, mutual funds offer all this expertise through their services.
Though mutual funds appear to be the safer and more attractive options in terms of reduced risks, professional management of portfolios, higher liquidity (in case you wish to sell your portfolio off) and lower investment amounts, most mutual funds come with hidden catches like, front end or back end loads and other hidden costs.
Worse is, these costs are incurred irrespective of whether the mutual fund is actually making you money or is losing your investment. Study the mutual funds ratings before you invest in a particular one. There are many different types of mutual funds and all of them have different niche workings, so will not go into the details of their individual dynamics.
Things to Consider Before Investing in Mutual Funds
Let us begin with a few very essential points that will help you learn to invest in mutual funds.
★ Though mutual funds rarely lose money, it is possible that they do so. As they are exposed to market risks, any market-wide fluctuations or market collapses can and will affect mutual funds adversely. As mutual funds are neither guaranteed nor insured by the FDIC or other government agencies, any mutual fund's loss is wholly the investor's own to bear.
★ Mutual funds are over hyped in the market because of their past performances, but as these are exposed to market risks and these risks fluctuate according to current economic scenarios, it is highly probable that history may not repeat itself. Though past performance is a good indicator of volatility, it is not always a good indicator of expected returns.
★ When investing in mutual funds, do not make the mistake of investing in them without a proper strategy in place. Do not indulge in potentially hazardous mistakes like going for an un-thought-out fund selection. If you choose a fund that does not match your investment horizon or income needs, you are also in for some trouble.
Blindly investing in funds that promise high returns is also fatal in the sense that the fund may actually be over-weighting high risk securities or may be leaving some risk undiversified in order to make the promised returns.
Other investment tips all stem from just one line of thought. Since you are investing your hard-earned money into something, it always pays to be aware of certain things. Such things that you should always be aware of when investing in mutual funds, are listed further.
★ Be aware of all fees and expenses and how they are applicable to you. Ironically, even the mutual funds that call themselves 'no-load' funds carry certain fees and expenses, so make sure you ask around about them.
Some of the fees that you will have to pay while buying a mutual fund include: Sales Charge on Purchases, Purchase Fee, Deferred Sales Charge, Redemption Fee, Exchange Fee and Account Fee. You may also have to pay Annual Fund Operating Charges, which include Management Fees, Distribution/Service Fees, Total Annual Fund Operating Charges and Other Expenses.
★ Know the class of shares that your mutual fund is investing in. The three different classes of mutual fund shares include: Class A Shares, Class B Shares and Class C Shares. Also find out all the various tax structures that you as an investor will fit into if you invest in the mutual fund.
★ This thing cannot be stressed less - please do read the mutual fund prospectus in its entirety. You may find on reading that what appeared to be a golden opportunity is not really so at all.
★ Gather all possible information on the fund manager and his historical track record in the field. Though this is not necessarily a verification of his life-long character, it should give you an insight on whether the mutual fund is likely to be active or passive, aggressive or dormant, etc.
So much more can be said on this subject, but it is best to be prudent, be safe and use your literacy when it comes to mutual funds. Never put a single penny anywhere unless you know exactly what you are putting it into.