how to choose a mutual fund

The stock market has long been considered the primary source for making big investment dollars. However, in years gone by, much of the public was reluctant to enter the market because they believed that it was simply a bit over their heads. They felt neither qualified nor comfortable selecting stocks and managing their portfolios. However, in recent years investment activity has begun to increase and this change is due in large part to the rise of mutual funds.

Mutual funds are financial products that bundle together a number of stocks into a single miniature portfolio. Each fund is carefully controlled by a designated professional manager. It is his job to determine when to buy, hold, and sell the individual stocks.  This arrangement provides investors with a couple of major benefits. A) It diffuses the risk. Even if a single stock does poorly the fund as a whole will not be greatly affected.  B) It reduces the amount of time and effort that is needed to invest. Once a fund is selected the manager takes control of all the decisions in relation to the individual stocks. However, before these benefits can be enjoyed an individual must carefully select an appropriate mutual fund. Let's take a looks at some tips that should be beneficial during this process.

• Look for low expense ratios. This ratio represents the amount of costs and fees that an individual is charged to invest in a particular fund. These figures will vary significantly from company to company. It would never make sense to select a fund with a higher than normal ratio, unless their earnings are typically high enough to compensate for these costs.

• Low turnover is best. Turnover relates to how often funds are bought and sold within a portfolio. The more often these transactions occur, the more costs that are incurred. These costs inevitably get passed along to the investors. In addition, the higher the turnover rates the higher the probability that individuals will be assessed short term capital gains taxes.

• No load funds save you money. Load funds charge investors money to buy into (front load) or sell out of (back load) their investments. There is no reason to select a fund with these associated charges, unless an individual is confident that the returns will offset the cost. However, in general it is best to select a no load mutual fund.