CONSIDERATIONS WHEN BUYING A MUTUAL FUND
Certainly, there is sure money in mutual funds, but an investor must be wary of several pitfalls which can hamper their investing goals. Also, too much focus on short-term results can be a hindrance.
Benjamin Graham, the father of value investing, said short-term fluctuations are arguably random. The only way to gauge a mutual fund’s performance is to observe it over the last three to five years. A manager with a few not-so-good quarters but a great long-term accomplishments can still be considered a good catch. Unless the mutual fund manager has a strong long-term record, buying into a fund after a sturdy short-term run and great achievement won’t likely happen again. Fund flows can also affect performance.
Managers in small-cap stocks can begin to dwindle if they become too popular, with high asset levels it can become too difficult to seek opportunities in smaller firms. Quick inflows and outflows can also impact performance as they manager may be forced to invest new funds or sell to reach redemptions, meaning he is forced to buy or sell that may not be based on whether a bond or stock is a good value at the prevailing price.
Defensive investors won’t have enough time or are not interested to look for securities to purchase. But it should not stop them from finding the right mutual fund and researching the manager. The research entails management’s performance, reputation, and reviews/comments about the mutual fund company they work for.
Investors can look at various metrics before deciding to invest in a mutual fund. Morningstar creates a site to evaluate funds and reveals information about funds, including asset allocation and a combination of assets being held. They can also use the investment style box decoding a fund between the market cap it focuses and investment style. Or, investors can check a fund’s expense ratios, which denotes a fund’s investment holdings, the team’s biographical details, its stewardship skills, and number of years they have been in the industry.
A good mutual fund should posses the following characteristics: great long-term track record, reasonably low fee, invest with a consistent approach according to the style box, and a solid management team.
Yes, there are instances a mutual fund earns a bad image in general. But as long as the fund is performing well among its rivals, and you have done due diligence, this can be a great way to diversify a portfolio.
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