Mutual fund investing can be overwhelming. There are hundreds of mutual fund companies and thousands of funds spread across hundreds of different market sectors. Our method of analyzing mutual funds is rather simplified but should yield as good of results as many financial advisors can give. To find the right mutual fund, research using the following methods:
Determine the Mutual Fund Sector(s) to Invest In - Should you invest in large cap, small cap, growth, value, bonds, international, health care, technology or other sector funds? The answer depends mainly on how much money you have to invest. If you have several hundred thousand dollars to invest, you should diversify your mutual funds over a dozen funds or more, with as little overlap as possible between the mutual funds. In this case you could choose many specific sector funds if you prefer. If you are just starting out and want to invest a few hundred or few thousand dollars, then you should stick to one fund that is general in nature. In other words, the more money you have, the more variety of mutual funds you should purchase.
Also, you should pick your mutual funds based on your age and your investment goals. If you are simply speculating, you'll want to stick with pretty specific sector funds. This increases your risk and chance of higher return. Also, the younger you are, the more risk you can withstand in your portfolio. Regarding age, the older you are, the more diversification you should take. For example, if you are nearing retirement, you'll want a large portion of your portfolio invested in bond mutual funds. Take this information into account with the information from the previous paragraph and use them together. For example, if you are young and don't have a lot of money to invest, you should pick one or two general funds that replicate the overall stock market. If you are older and have lots of money to invest, you should own several funds including both foreign and domestic stock and bond funds.
If you know what sectors of the market you want to invest in, you can determine your fund sector based on personal preference. For example, you may believe that technology, oil, or healthcare stocks are poised to rise faster than the rest of the market. If this is the case, and you are okay taking the extra risk, then you could invest in specific sector funds that match your beliefs. Often, it is a good idea to invest your money by the book (generally accepted investment philosophies, i.e. diversify, diversify, diversify), but it also makes sense to invest most of your money by the book and invest the rest in sectors that you find particularly appealing.
With an idea of what type of funds you want to invest in, it is time to narrow down the list to a group of fund families that you find acceptable.
Find Acceptable Mutual Fund Families - You'll want to pick mutual fund companies that have a wide variety of options, low fees, no loads and most importantly, a great reputation. I usually choose the large mutual fund companies that have avoided any scandals, but small fund companies can be just as good if not better. By selecting large companies you can choose between many different mutual funds under one family. Also, large mutual fund companies often charge lower fees and have better insider trading and fraud protection programs. Most importantly, a larger mutual fund company doesn't rely on one single portfolio manager for all of its funds. That means that just in case the manager leaves the firm, there will still be several other capable managers to take over. Our favorite mutual fund companies (at the time of this article) are Vanguard and T. Rowe Price - they both have no loads, low fees, good reputations and a large variety of funds. Once you've done your research and have formed a list of several fund families, it's time to pick your specific funds.
-- ABC Stock Investment --
(To be continued)
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