How to pick the best mutual funds: 7 essential tips for beginners

There are thousands of mutual funds on the market at any given moment. So how exactly do you choose? While choosing a mutual fund may seem difficult, it doesn’t have to be.

Mutual funds allow groups of investors to pool their money, and the fund’s manager then selects investments that align with the fund’s investment strategy. As a result, the individual investors who buy shares in the fund are actually investing in those assets selected by the fund manager. Because of this, finding a mutual fund that aligns with your goals is vitally important.

That’s just one of many factors in deciding which mutual funds are right for you.

7 essential tips to pick the best mutual funds

Here are some tips to help you select the best mutual funds for your needs.

1. Consider your investing goals and risk tolerance

There are many, many mutual funds. Just because a mutual fund is popular doesn’t mean it’s the right fund for you. It may be helpful to ask yourself some questions: Do you want your money to grow steadily over time with a low level of risk? Do you want the highest potential returns? Questions like this can help you start to determine which fund is right for you.

Also consider your risk tolerance. For instance, are you willing to tolerate large swings in your portfolio’s value for the chance of greater long-term returns? If you are investing for retirement, it’s typically best to keep your money invested for the long haul.

But if a very aggressive strategy will cause you to get cold feet and sell your investments, it’s best to adjust your strategy to something more suited to your risk tolerance. After all, selling your investments may also result in missing out on returns. Plus, you may realize capital gains and incur tax obligations depending on the type of investment account.

Your time horizon is also important. If you need to access your money in less than five years, an aggressive growth fund is likely not the best strategy. One example of a fund that has the time horizon already built in is a target-date fund, which adjusts its risk level based on how close you are to retirement age.

Often, investors with a long time horizon and a high risk tolerance will generally earn higher returns by investing in all-stock mutual funds because they can afford to take on more risk over time. Those who need some degree of safety, and are nearing retirement for example, will likely want to turn to mutual funds that have more exposure to bonds or other fixed income investments.

2. Know the fund’s management style: Is it active or passive?

Another way that mutual funds can vary is their management style. One of the largest contrasts can be seen when comparing active and passive funds. With actively managed funds, the fund manager buys and sells securities, often with a goal of beating a benchmark index, such as the S&P 500 or Russell 2000. Fund managers dedicate significant time to researching companies, economic trends, and other factors in order to achieve better performance. However, this can result in high fees for actively managed funds. It is important to evaluate whether these fees align with your financial situation and goals by considering the fund’s past performance, volatility, and turnover. Over time, passive funds tend to outperform active funds, especially when factoring in fees.

Understanding the different types of funds, such as large-cap, small-cap, value, growth, and income funds, can help investors make informed decisions. It is also crucial to be wary of high fees, including front-end and back-end load fees, as well as expense ratios. Researching a fund’s past performance, management team, turnover rate, and benchmark comparison can provide valuable insights before investing.

Diversifying your portfolio with various asset classes, such as international funds, bonds, and real estate, can help reduce volatility and improve long-term performance. Staying focused on long-term growth, maintaining a diversified portfolio, and seeking the advice of a financial advisor can help investors navigate the complexities of mutual fund investing. Remember that past performance does not guarantee future results, but a well-balanced and diversified portfolio can potentially grow over time. The period from 1966 to 1982 marked the longest downturn in the stock market. Despite this extended period of decline, the DJIA experienced a sharp rebound and showed consistent growth for the next 17 years, with some minor fluctuations along the way.

This highlights the importance of adopting a long-term investment strategy. While there are risks associated with investing in mutual funds, selecting funds with a proven track record of performance and experienced fund managers can help mitigate short-term risks and maximize long-term portfolio growth.

If you require expert guidance in managing your investments or planning for retirement, Bankrate’s AdvisorMatch can connect you with a CFP® professional to assist you in achieving your financial goals.

FAQs about selecting mutual funds:

1. How do I choose a good growth mutual fund?
The suitability of a mutual fund depends on your individual financial goals. However, certain funds outperform others. It is essential to research the fund’s objectives, performance history in comparison to its benchmark, management team, and fees to determine if it aligns with your portfolio objectives.

2. What mutual funds are best for beginners?
Beginner investors may benefit from investing in index funds that track benchmarks like the Nasdaq 100. Index funds, whether mutual or exchange-traded, typically have low fees or even no fees at all. These cost-efficient options enable investors to retain a larger portion of their returns and are an excellent starting point for wealth accumulation.

3. How do I sell shares of a mutual fund?
To sell mutual fund shares, you need to place a sell order directly through your brokerage or the fund company. The shares are sold based on their net asset value (NAV), which is calculated at the end of the trading day.

In conclusion, it is crucial to evaluate your long-term objectives, risk tolerance, and investment horizon when selecting mutual funds. Understanding the fund’s management style, target market segments, and historical performance is key to achieving long-term growth in your portfolio.

Please note that investors should conduct their own research into investment strategies before making decisions, as past performance does not guarantee future price appreciation.