According to theCompany Institute (ICI), mutual funds make up more than 67% of all American retirement assets and continue to be a vital part of the portfolios of 90+ million people.
Like all, mutual funds have their risks, so it's important to know the essentials before .
Here are five questions to ask before mutual fund:in a
1. Does the Mutual Fund Addto Your Portfolio?
But before you add another mutual fund to your portfolio, be sure and read the fund's to see the fund's "top holdings," which display the companies, security types, sectors and/or countries that the fund is heavily invested in. If you already own the companies held by the fund, don't buy it. Investing in a fund that tracks companies you already own not help increase your exposure to different investments and only magnify your portfolio's risk should the fall.
If you are younger with a longer time horizon, your portfolio should consist of mostly stock funds for greater growth potential. As you get closer to retirement, invest a greater percentage of your portfolio dollars into safer funds (such as and money market funds) with less growth.
[InvestingAnswers Feature: Diversified Investments: Beginner's Guide to Protecting Your Nest Egg.]
2. Does the Mutual FundLow Fees and Expenses?
Look closely at all of the fees and expenses associated with the fund so you know how large of a bite you can expect to be taken out of your returns. According to ICI, the average stock fundwas 1.45 percent in 2010.
For example, if a mutual fund carries a 5% load and you invest $1,000, $50 be taken out before the $950 is invested.
Let's look at how a fund with a 5.75% sales load and a 2.0% totalcompares to an without fees. We'll assume a 10% annual return on a $25,000 for 20 years:
Fund A (without fees) grew to a balance of nearly $58,000 more than Fund B in just 20 years!
If a fund has high loads or fees, look for a comparable no-load mutual fund or anto minimize expense and maximize your dollars.
3. Does the Mutual Fund Have a Good Track Record?
A fund investor's aim is to get the highest return with the least risk. But even the smartest investors make the mistake of only looking at a fund's past performance.
If you find a fund with strong past performance, see if the fund's currentwas at the helm during the period or if the fund strategy has changed; otherwise you can't be sure whether or not the fund have future success.
Also look for funds with a long track record (15 years or more is best) of steady success rather than a two-year hot fund that could fizzle out down the road.
4. Is the Fund Tax-Efficient?
Mutual fund investing outside of a retirement plan can cause huge tax headaches without the consideration of one key factor: capital gains distribution. A fund must make capital gains distributions to shareholders (at least once annually) if it makes a net profit from selling securities. Upon receipt of the distributions, shareholders must pay on the amount.
To see how tax-efficient a fund is, look at the fund's turnover rate (found in the), which tell you the fund's trading frequency. The lower the turnover rate, the lower the capital gains distribution (and ). The average stock fund turnover rate is 53% according to ICI, but many stock funds a much tax-friendlier rate of 35%.
See when the fund makes its annual capital gain distributions and consider whether the distribution add to your . You may save considerably on taxes by waiting to buy the fund after the distribution is paid.
5. Are the Share Class Types Right for Me?
Mutual funds can come in three Class A Shares, Class B Shares or Class C Shares. Each share class has the same portfolio, objectives and policies but have different shareholder services, fees and expenses.:
Get projections of growth and expenses to see which class of fund is the best choice for you. These small differences can have a massive impact on performance results.
The Investing Answer: Good mutual funds are the bedrock of a successful retirement or wealth for years to come.portfolio. The best funds match your strategy, low fees, and deliver solid, tax-friendly returns that build your
- Create a retirement savings goal
- Design an investment plan to reach it.
- Get a professional money manager to continually monitor and rebalance your portfolio
Sound complicated? Don't stress. Vanguard's new robo advisor service can help you put all of this (and more!) on autopilot, all for an annual gross advisory fee of just 0.20%.