What are the factors to consider while selecting the best mutual funds for investing?
There is almost no one who doesn’t want to achieve financial independence in life. To hit that goal, you need to forget the term ‘savings’ and instead go for smart investments.
As we all know, the stock market is one of the best paths to achieve financial independence by investing your money smartly.
If you are planning to enter the stock market, several organized funds are there to start with. Currently, plenty of choices is there when you think of investing in funds. Starting from mutual funds, there are hedge funds and Exchange Traded Funds too.
However, mutual funds are still the main focus of investors. Not only beginners but also highly experienced investors do consider investing in the best mutual funds.
Are you also planning to invest in mutual funds but not sure from where to get started?
Then this guide will help you with the factors to consider while selecting the best mutual funds for investing.
Just take out 5 minutes of your time and read this entire guide to become a hero of mutual funds selection at the end.
What are mutual funds?
Just try to go through the name and you will easily get the basic meaning.
A mutual fund is a fund that is created from mutual investments of various investors, that is, it’s a type of fund that is created from a pool of money invested by many investors.
This money is then utilized to buy various money-building assets like stocks, bonds, or others.
In 1924, three Boston money managers pooled their money together and that was when the first mutual fund was created.
Following that, this simple concept has got worldwide popularity and has transformed into one of the greatest industries.
Mutual funds are usually operated by professionals known as fund managers. They allocate the fund’s assets and work to achieve higher returns for the investors.
It leverages the advantage of diversification by creating a portfolio of stocks and hence the returns of the funds are generated through the combined returns of individual stocks included in that portfolio.
We have discussed enough the mutual funds, so let’s head over to the various factors that you need to acknowledge for selecting the best mutual funds to buy.
How to pick the best mutual funds for investing?
Thousands of mutual fund companies are there and hence, it is a lot confusing to select the best mutual funds for investing.
To make it simpler, there are certain factors that will help you to select the top ones and create wealth through the magic of compounding.
Goals and Risk Tolerance
Before doing any kind of investment, you should have a small discussion with yourself about your investment goals.
- Do you have long-term investment planning or short-term?
- Is getting a regular income more important to you?
- Are you willing to create a retirement fund that is after 20 or 30 years?
- , and others.
Having a self-discussion on investment goals is essential for filtering out the best mutual funds that are as per your requirements.
After this, you must also be aware of your risk appetite. It implies that whether you are okay with the frequent ups and downs of your invested money or want a more stable fund with the lower risk involved.
Please note that risk and returns are the two sides of a coin. So, if you want to take a lower risk, you must also control your desires for higher returns which you can get with higher risk mutual funds.
Extra costs involved
Asset Management Companies (AMCs) or mutual fund companies charge fees from the investors to run.
So, before investing in mutual funds, you should do proper research about the fees involved in them.
The sales charge of a fund is termed as a load that is usually charged at the time of buying or selling.
If the charge is deducted at the buy time, then it is known as the front-end load fee while the back-end load fee is the one at the time of selling.
The back-end load fee is mainly intended to prevent the investors from buying/selling frequently. That’s why it is charged if they are sold before a set time.
Both these charges can vary depending on different mutual fund companies and they also include the administrative charges.
Apart from the above two, there are some other fees involved too, like the level-load fees, expense ratio, etc. You must check the expense ratio before investing in any mutual fund.
Information about the fund manager
As mentioned earlier, mutual funds are managed by professional fund managers. Thus, while choosing a fund, it’s important to conduct research about the fund manager.
It means that you should check the historical data about the fund manager, his experience in this field and find out whether the fund manager was successful in creating consistent returns for the past few years.
Analyzing the fund manager of a particular will also help you to understand the fund’s capability to mitigate risks and its performance during the market crash.
So, it is worth noting that gathering information about the fund managers will indirectly help you to track the performance of the mutual fund.
Hence, it is also important to check the past performance of the mutual fund before selecting it for investment.
Type/Style of the mutual fund
We have already told you in the first point that you must set your goal before doing any kinds of investments in mutual funds. Depending on your goal, you need to select the fund type.
Generally, people invest in mutual funds for long-term capital appreciation. For that, you need to select growth funds that will grow your invested capital.
However, you need to have the capability for handling some amount of risk and volatility that the stock market is known for.
On the other hand, if you are more attracted towards current income through dividends, then income funds can be a better choice.
It’s so as the growth funds will be helpful for capital appreciation but they don’t pay any sort of dividends.
The income funds keep bonds and other sorts of debt instruments in their portfolio. These funds can also be long-term, short, or medium-term.
The bonds and other debt investments possess a very low connection with the stock market and hence they can be less volatile.
However, you may have to face other kinds of risks like credit risk, default risk, prepayment risk, or interest rate risk.
If you want to invest for the long-term yet are not ready to digest enough amount of risk, then a balanced fund can be the best choice.
These balanced funds are named so because their holdings include both stocks and bonds.
Type of management (Active/Passive)
Mutual funds can be broadly classified into two types based on their management – active and passive.
The active funds are those that have portfolio managers who decide which stocks or assets can be included in the holdings to beat the market returns.
But, the fees included for these funds are generally higher with expense ratios of 0.6%-2%.
Index funds are often referred to as passively managed funds since they are a basket of stocks that track a particular index or the performance of their underlying assets.
The assets included in these funds are not traded very often until the constituents of the index don’t change.
These passively managed funds also require lower fees than their counterparts.
It’s not quite clear whether index funds or actively managed funds are a good choice because very few actively managed funds have successfully outperformed their benchmarks.
So, index funds gained decent popularity among long-term investors.
This is not a very important factor to check but still, you need to consider it for full research before investing.
Too big funds can be sometimes dangerous for investing. For example, Fidelity’s Magellan Fund became very big with 100$ billion assets when it was forced to change the investment process.
Due to this change, the returns of the fund suffered a lot.
These are some of the factors that will let you pick up the best mutual funds for making a good investment decision.
Best Mutual funds for investing now in the US equity market
In this section, we will highlight some of the best mutual funds that you can consider investing in.
These funds are just as per our research, so please do thorough research yourself before investing in anyone.
Vanguard US Growth Fund Investor Shares (VWUSX) – large US growth companies.
Shelton Nasdaq-100 Index Direct (NASDX) – replicates Nasdaq-100 index.
Vanguard Small-Cap Value Index (VSIAX) – value stocks of small US companies.
Schwab Fundamental US Large Company Index Fund (SFLNX) – tracks overall Russell RAFI US large company index.
Voya Russell Large Cap Index Portfolio (IIRLX) – Russell Top 200 index.
Why should you invest in mutual funds?
Investing in mutual funds or keeping them in your portfolio is much beneficial in various ways. With low investment and load fees, the main advantage that it provides is diversification.
You can only invest a few thousand dollars to become a partial owner of different popular companies across various themes in the US stock market.
So, if a majority of the stocks in the holdings of the mutual funds perform well, then you can appreciate your capital to a larger extent.
Some mutual funds that fall in the category of income funds also pay dividends that help you to generate current income.
Categorization of mutual funds
Mutual funds are classified into various types depending on the type of investments they are involved in. Let’s take a look at the various types of mutual funds –
Stock Mutual Funds – They mainly consist of securities of different companies in their portfolio.
Bond mutual funds – As implied from the name, these mutual funds invest in government and corporate bonds.
Balanced Mutual funds – These mutual funds is a hybrid of stock mutual funds and bond mutual funds because their holdings are composed of both securities and bonds.
Target-date Mutual Funds – You invest in them when you want money for a specific target, for instance, retirement planning. Depending on your target, they choose the type of investment.
Money market Mutual Funds – They contain safer securities like cash or other kinds of debt investments making it safer than either stock or bond mutual funds but they generate a lower return.
Alternate investment options
Exchange-Traded Funds: As an alternative to mutual funds, you can also buy ETFs or Exchange-traded funds that offer you the flexibility of diversification like mutual funds and also ease of trading like stocks.
You can buy or sell these ETFs anytime throughout the day like stocks which is not the case with mutual funds as they are traded only once.
To know more about ETFs, please take your time and go through the following:
Fixed Deposits: You can choose this as an alternative to the money market mutual funds because the overall returns are almost the same in both.
Fixed deposits or high-yield savings accounts are also safer than mutual funds because your invested capital will not suffer volatility.
Stocks: Investing in individual stocks of companies can also be a better option if you are knowledgeable about the stock market.
However, mutual funds are a far better option than creating a portfolio of stocks on your own.
It’s because mutual funds portfolios are managed by professional fund managers who are much skillful in the concerned subject.
Hope you have liked this guide and enjoyed it. Not only that we have discussed the things to consider for choosing the best mutual funds, but also we have pointed out the top ones to invest in and other relevant information.
We suggest you invest in different types of mutual funds for better diversification and also to enhance the overall returns.