Mutual funds are definitely becoming more and more popular nowadays since more and more people are looking for ways to grow their money aside from the usual saving and time deposit accounts offered by banks.
Mutual funds open the door to a simple, uncomplicated path to increased wealth. They’re also one of the best ways to diversify your investments and spread your risk. As I mentioned in one of my articles before, mutual funds are companies that gathers a large pool of money and invest it in a broad range of stocks according to specific set of rules.
The beauty of mutual funds is that they have enough money to invest in a wide range of stocks, bonds, or whatever else their prospectus allows them to. And instead of owning a few shares of just a few companies, you can have equity in lots of companies.
In choosing which mutual funds you should invest in, here are some of the tips to maximize the earning potential of your money through mutual fund investment.
1.) Choose according to your taste - A lot of mutual funds exists, and each has its own specialty. A fund may concentrate on large-company stocks, government bonds, a business sector like communications or energy, or an investing strategy like growth or value. Within that specialty, it will buy as many different assets as it can.
Mutual funds have fund managers and staffs of analysts who save you the time and effort of studying and tracking individual investments. Choose a fund that fits your particular taste, and you’ll watch your wealth as that entire segment of the economy grows. It’s a slower, but surer, path to making your fortune than betting the farm on individual stocks.
Of course, nothing in the stock market is guaranteed to make money, including mutual funds. But when a fund owns a hundreds of stocks, the failure of one or two of them has little effect. That diversification protects you from losing your money if one or two stocks take a dive.
2.) Consider management style - The biggest difference in funds is whether they are actively or passively managed. An active mutual fund is one where the manager tries to beat the market by picking out the winners. He or she will actively evaluate and trade stocks, generally on a daily basis. These funds will have management fees to pay for the extra effort needed to try and score higher gains.
On the other hand, passive funds such as index funds or exchange traded funds only try to copy a certain index, such as FBM KLCI ETF for Malaysia KLCI index, or the Standard and Poor (S&P) 500 and the Dow Jones Industrial Average (DJIA) in the US. it contains just the stocks or bonds in a particular index, so its value follows that index. Because there is little trading, you only pay minimal fees and commissions.
3.) Compare types of funds - Most mutual funds are open-ended funds, which means they have no limit to the number of shares they can issue. At the end of every trading day, the fund determines its net asset value (NAV), which is its total assets minus total liabilities divided by the total number of shares outstanding. This NAV is the price a mutual fund will charge you to buy new shares or pay you if you sell.
4.) Watch out for charges - Loads are sales commissions charged by mutual fund companies and can range from 1 to 2 percent of your investment. If you put, say, RM 10,000 into a fund with a 5% front-end load, only RM 9,500 is invested, and RM 500 goes to the fund. If you redeem or cash in RM 10,000 from a 5% back-end load, you only get RM 9,500.
In addition to loads, mutual funds, especially active funds, may charge management, custodial, or maintenance fees. When evaluating a mutual fund, it’s important to subtract the extra fees from the gains it makes when figuring your overall yield. Index funds and exchange traded funds, however, are a good choice because they have ultra-low charges.
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