Choosing Mutual Funds

6 Things to Look for When You’re Choosing a Mutual Fund

As a single mom, your time is tight. You don’t have tons of free time to spend on research – and that can be a big stumbling block that turns you off investing.

That’s why mutual funds are a great way to get started: they offer access to hundreds of stocks or bonds in every single share, letting you own a much broader mix of investments than you could put together on you own. But there are literally thousands of mutual funds out there, and to figure out which ones are right for you, turn to your financial action plan.

A solid financial action plan tells you which types of investments fit with your goals. If you haven’t created a plan yet, this is the time to make one – before you buy investments. Owning investments that are wrong for your situation can lead to financial insecurity – the opposite of what you’re trying to achieve.

Once you know generally what types of funds you want to invest in (large-cap stocks, corporate bonds, and international stocks, for example), it’s time for a little research. Good sites to use for your research include:

With these easy-to-navigate tools, you’ll be able to get your research done in as little time as it takes for your kid to have a bath.

So, before you put your hard-earned money into any mutual fund, look at these 6 factors to make sure the fund you choose will work its hardest for you.

  1. Go with no-load. In the world of mutual funds, loads are sales charges, sort of like commissions. For example, if you have $10,000 to invest in a mutual fund with a 5% load, you’ll automatically lose $500 of your money to that sales charge. That’s right, these loads come straight out of your investment, and they can take a serious toll on the compounding power. So keep more of your money working for you by sticking with no-load funds.
  2. Save and earn more with index funds. There are basically two types of mutual funds: managed (active) funds and index (passive) funds. With managed funds, financial professionals actively choose and trade every stock (or bond) in the mutual fund – all in the hopes of outperforming their benchmark index (what they use for comparison). Because the fund has to pay the professionals, those costs get passed along to investors as higher fees. Index funds, on the other hand, model their portfolios after the benchmark index, which keeps costs way down. Plus, most of the time index funds do better than managed funds. That’s a double bonus with index funds: lower costs AND better performance. Learn more about index investing here.
  3. Ignore short-term returns, focus on long-term returns. Any fund can perform well when the stock market rallies. It’s the funds that do well over long periods of time, through ups and downs, that hold the most promise for future growth. Remember: past returns have nothing to do with future returns, and a fund that’s done great in the past could tank in the future. But you have a better chance of success if you look at funds with solid long-term track records.
  4. Look for a low expense ratio. Every fund charges expenses – it’s the cost of owning a fund – but the amounts vary widely. If two funds are essentially the same, the one with the lower expense ratio means higher returns for you. And even though expenses may not seem so different (0.10% vs. 0.50%, for example), the difference in your earnings over time can be shocking.
  5. Avoid funds with high turnover ratios. Turnover refers how often the stocks (or bonds) in a mutual fund get bought and sold. Mutual funds have to pay trading fees every time they buy or sell, meaning higher fund costs. On top of that, every time they sell pieces of the portfolio, they create a taxable transaction for you (unless you’re investing through a retirement account like an IRA or 401k). That’s right: High turnover usually means a higher tax bill for you, and that eats away at your earnings even more.
  6. With managed funds, the manager really matters. If you decide to go with a managed fund, look for information on the portfolio manager. What kind of info matters here? Look for:
    • Longevity: how long they’ve been managing this fund – look for at least 5 years
    • Long-term track record with this fund and any others they’ve managed
    • Loss history, especially during times when the markets are performing very well
    • Typical turnover ratio

    You can also look for articles about the managers, or their letters to the fund holders to learn more about their investment philosophy. Here’s a good article on evaluating mutual fund managers from Investopedia.

Bottom line: There are so many resources out there to help you narrow down your mutual fund choices so you can pick the best ones for your financial plan. The amount of available information can be overwhelming, so focus on these 6 factors to help you make your choice.

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