Mutual funds as a long-term investment? Why not!

If you desire to invest in mutual funds, take into account the following factors when choosing the right one: mutual fund expenses, management style, and your financial goals.

Mutual fund expenses. Fees can take a huge portion out of your prospective returns. So before buying shares, find out if the mutual fund has a sales load, as well as its expense ratio. It often charges a load fee when purchasing a fund from an adviser or broker, compensating for the time and expertise rendered in picking the right fund for you.

There are three types of fees levied by an advisor or broker: front-end load, back-end load, and level-load fee. Several studies show no huge difference between load funds and no-load funds in terms of performance. Therefore, there is no rationale for paying high fees on load funds.

The expense ratios refer to the percentage of assets subtracted annually to recompense for the fund’s expenses. It includes administrative fees, management fees, operating costs, and other costs.

Management style. Next, figure out if you want a mutual fund that is actively or passively managed. Remember, there is a huge difference between the two.

In an actively managed fund, managers exert a great amount of research on assets. When they do, they consider various facets such as company fundamentals, sectors, economic trends, and macroeconomic factors in their decision-making. Active funds seek to surpass a benchmark index, based on the type of fund. They often charge higher fees for these funds, while expense ratios can range from 0.6% to 1.5%.

On the other hand, a passively managed fund monitors a benchmark index’s performance. Such funds do not trade their assets very frequently, unless the composition of the index changes. Also, passively managed funds may have thousands of holdings. But since they are not that active, the funds do not generating as much taxable income. Its expense ratios are as low as 0.15% and levies lower fees than actively managed funds.

Only 24% of active managers outmatched the returns of the overall market. It can be attributed to the higher fees charged by active funds, as well as the condition of the overall economy since the 2008 financial crisis. However, certain funds can outperform the market depending on their star managers. So, in the event the manager leaves the fund, its future performance is at stake. In most cases, a passively managed fund may be a better choice.

Financial goals. Basically, those who invest in mutual funds seek to either bolster the fund’s value or earn income through interest payments, dividends, and the like. It varies according to a person’s risk tolerance and overall financial status.

In essence, capital appreciation is the primary goal for growth funds. These funds not pay no dividend and its assets may be more volatile due to the high-growth nature of companies. Hence, it is advisable to have a greater risk tolerance. Conversely, consider bond mutual funds if you want to profit. It invests in bonds with regular distributions. In most cases, such funds have less volatility, and also minimal or negative correlation to the stock market.