Maximizing the Benefits of Mutual Funds

Mutual Funds

Many individuals decide to start investing in mutual funds rather than individual stocks due to the perception that there is decreased risk associated with funds. While the risk of the investment will vary from fund to fund, the fact is these funds generally do allow you to diversify your investment across various companies or even various sectors. If you have made the decision to invest in mutual funds through your own investment account or with the assistance of a broker, you should take time to learn how to maximize the benefits of your investment.

Mutual Funds
Review the Costs

There generally are costs associated with buying and selling these fund shares, and you will need to analyze these costs carefully. Some brokerage houses will charge an annual fee for a brokerage account but not fees to buy or sell shares. Some online brokers will charge you a per-trade fee, and this can be expensive if your intent is to make smaller but frequent investments. It is important to note that some brokers and fund companies charge different fees in association with different funds. For example, it is possible to find some funds offered with no commission at all.

Analyzing the Return

While the fees associated with your funds is important, it is also important to analyze the return on your investment periodically. To fully maximize the benefits of mutual funds, you must consider diversifying your investments across multiple funds, but you also must consider the option to liquidate your assets and re-invest in a new fund if a better opportunity presents itself. Remember that past performance can indicate excellent management of funds, but the performance of the fund going forward will be dependent on how well its investments perform. Therefore, you should put a mutual fund calculator to use to analyze your funds periodically, but you should also take time to review how the fund’s investments are allocated.

Many investors believe that because a fund provides the opportunity for an investor to purchase small shares of many companies, their portfolio is diversified simply by purchasing these funds. However, it is important to consider how each fund is allocated. If you purchase two funds that are heavily invested in technology, this is not necessarily the basis for a diversified portfolio. However, if the funds themselves are chosen based on their diversification and other investments such as CDs, bonds, real estate and others are included in a portfolio, you can enjoy the benefits of a truly diversified portfolio.