Before choosing the right mutual fund in your investment portfolio, an investor should identify his financial needs and goals, as well as his risk tolerance and time frame. By doing so, he can deduce the list of more than 8.000 mutual funds in the United States. But what is the selection process for mutual funds?

Types of Mutual Funds

There are different types of mutual funds to choose from, developed to cater the investors’ needs and goals. But this article will concentrate on the three varieties of mutual funds: equity fund, income fund, and balanced fund.

Equity fund is the right mutual fund for investors who have a longer-term need and are willing to take on a fair amount of risk and volatility. This fund normally hold a high percentage of their assets in common stock. Although it is volatile in nature, it can also reap a huge reward over time.

Income fund is suitable for conservative investors and retirees. Such funds are designed to provide a steady income on a regular basis, which invest primarily in government and corporate debt.

Balanced fund is tailored for investors who have a longer-term need but are not willing or not capable of assuming substantial risks. It invests in both stocks and bonds, aiming to give a balanced mixture of safety, income, and capital appreciation.


Mutual funds have different fees, which are charged to investors upon purchasing an investment. Some funds charge load fee, which is paid on the initial investment or sale of the investment. Others impose front-end load fee upon placing the primary investment. Back-end load fee is levied after selling the investment, usually at a determined time period (e.g. seven years from the purchase).

Both front-end and back-end loaded funds typically place 3% to 6% of the total amount invested or distributed, but by law, the figure can escalate by around 8.5%. This is to discourage turnover and cover administrative fees relative to the investment. The fee can go directly to the mutual fund or to a broker for selling the fund.

But for putting together a portfolio, look for no-load mutual funds. Although it has no front-end or back-end load fees, it charges other fees including the management expense ratio and other related fees.

Other funds have 12b-1 fees, which are incorporated into the share price and used by the mutual fund for promoting, selling, and other activities in relation to disbursing fund shares. Such fees come off of the reported share price at a preset point in time. Because of that, investors may not be familiar with this fee at all. This can be as much as 0.75% of a fund’s average assets annually.

Before looking into these fees, pay attention to the management expense ratio. The ratio will clear your queries about sales charges on mutual funds. It refers to the total percentage of fund assets being charged to shoulder fund expenses. The higher the ratio, the lower the investor’s return at the end of the year.


A mutual fund’s size has no bearing on its ability to meet its investment objectives. But there are particular times a fund can become too large. Take the Fidelity's Magellan Fund as an example. In 1999, the fund held $100 billion in assets under its management. The entity was pressed to modify its investment process in order to accommodate huge money inflows daily. But its focus shifted on larger capitalization and growth stocks, instead of being alert and obtaining small-cap and medium-cap stocks. Hence, its performance suffered.

How large is too big? There is no specific cap but a $100 billion mark makes it difficult for a fund manager to obtain a stock position and dispose it without drastically gliding the stock upward and pushing it downward. It also makes buying and selling stocks with any kind of anonymity almost impossible.

Mutual Fund and Fund Manager’s Previous Performance

Investors should also research on the fund’s previous results. Ask yourself the following questions: Was the fund manager able deliver consistent results relative to general market returns? Was the fund more volatile than big indexes? Was there an unusually high turnover? This is important for investors to have an insight on the portfolio manager’s performance under certain situations, and the fund’s trend throughout the years in terms of turnover and return.

However, past performance does not necessarily reflect future results. Before acquiring a fund, one should read the details about the company in order to review the anticipated trends in the market in the future. Most of the time, a fund manager will provide some sense of the prospects for the fund and/or its holdings in the coming years, as well as discuss overall industry trends which may be helpful.