A mutual fund is a professionally managed portfolio of stocks or bonds or both. These investment vehicles have become a staple for consumer investing. There are some metrics for evaluating mutual funds and the strategy of investing in them.
Each mutual fund will have a strategy. Some have a broad approach, such as a target date retirement fund. These target funds will have stocks, bonds and some cash and will be more aggressive when the target date for retirement is quite a few years away; they then become more conservative as the target date comes closer. Other funds will have a narrower focus, such as small cap stocks with a value investment approach.
There are a few issues worth examining for any mutual fund. One is how many years the manager has managed that fund. Many funds have a team management approach rather than an individual manager. There will still be information available about the team’s average years of experience.
The fee structure of a fund is important. Some financial advisers are paid for their financial advice by commissions from the funds they sell to their clients, which is a legitimate way to pay your adviser. The adviser should be able to tell you what you are paying. These commission funds will reflect a sales charge, either when the fund is purchased or throughout the time the fund is owned by the client.
There are also fees to manage the fund. Compare the performance of the fund with the fees of the fund. For example, assume there are two similar mutual funds that own stocks and each has an average annual return of 8% over 10 years. One fund has annual fees of 1% and the other has fees of .25%. If the fund with the higher fees never varies more than 3% from the fund’s average performance, that might partially explain why the fees are higher. But high fees may ultimately impact your investment return.
Having multiple funds with the same strategy doesn’t provide more diversification. Often the funds with the same asset allocation approach hold many of the same holdings. The mutual fund itself provides diversification.
Deciding on the allocation of the funds you choose — how much in large companies, small companies, international stocks and bonds — depends on your situation. What works for couple in their 30s who are starting a family might not be a good idea for an 80-year-old single retiree. And a family that has two incomes over $100,000 has a different ability to absorb financial risks than does a family struggling to make ends meet through several minimum wage part-time jobs without benefits.
Investment decisions are related to other financial strategies. Having enough in savings to cover several months of expenses is a good safety net. Consistently spending less than you make is also important. It’s all part of the larger picture of managing your finances with intention.
Linda Leitz is a certified financial planner. She can be reached at email@example.com.