While most investors advise to not put all of your eggs into one basket, making mutual funds a part of your investment portfolio is a sound move. When you begin looking into mutual funds, you may walk away with the mistaken impression that investing strategies are incredibly simple. If you don’t look beyond the hype, you put yourself at risk for making costly mistakes. Here’s how to invest in mutual funds the right way:
1.Index Funds
According to some, investing in index funds is the first and only way to go. Before you sink your money into index funds, take a second look. The largest funds aren’t always the safest, as you’ll quickly find when you look at the world’s largest index fund, Vanguard 500. The fund’s assets comprise ten stocks and more than half of its assets are spread across three sectors. When investing in mutual funds, don’t always assume that index funds are the way to go.
2.Know the Risk
Before you decide to invest in any mutual fund, you have to know your risk. Instead of looking at how the fund has performed over the past year, look into the fund’s entire history. What you should look for is the fund’s largest loss in history for long-term investors. Also be sure to calculate how long it would have taken for investors to recoup their losses. Your maximum risk of cumulative loss should be at or below average.
3.Read Performance Numbers
You’ll undoubtedly read performance numbers before you invest, but make sure that you take the facts into consideration. When reports are run and provided, it is assumed that investors have put their money into the funds at the beginning of the year. This method of reporting makes returns look very promising. Consider when you will be investing your money. If you are investing in June rather than in January, your returns won’t be as promising.
4.Tax-Efficiency
As you research mutual funds, you’ll read about tax-efficiency. Don’t assume that a high percentage of tax-efficiency guarantees high profits. While mutual funds are a good option for people who want to avoid paying exorbitant tax rates, if the fund underperforms, tax-efficiency won’t matter. Look for a fund with a high tax-efficiency rate that is also an above average performer in order to realize the most return on your investment.
5.Consult a Professional
If you are investing in mutual funds, particularly as a part of your retirement savings goals, be sure to consult a professional for advice. While you can go it alone, speaking with someone who knows the ins and outs of the market can be incredibly beneficial. Keep in mind that you will be using the money that you make to fund your retirement years; mistakes that you make can be costly.
Mutual funds are a strong part of any good investment portfolio. If you have decided to invest in funds, be sure to follow the five tips above. If you don’t invest properly, you can be faced with losses that you never saw coming.
– Jaclyn Young writes for tradingacademy.com where you can learn more about the stock market.
