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How to choose a mutual fund

Region: Ontario Answer # 284

Choosing a mutual fund

There are many types of mutual funds available and the fund you select should reflect your personal investment objectives. An investment advisor can help you to determine both your investment objectives and help you to select a mutual fund that matches them.

When determining which fund is best for you, there are five main things to consider: the history of the fund, the current management of the fund, the philosophy of the fund, the performance of the fund, and the fees and risks associated with the fund.

1. History of the company or fund

First, mutual funds are sold by many investment companies, banks, and other lending institutions. You may want to consider whether the company or fund has an established history of making good investments and achieving a satisfactory level of returns.

2. Management of the fund

Second, the management team of any fund has a direct impact on the success of the fund because their decisions determine what securities are bought and sold. Many investment advisors feel that the management of the fund should have experience managing the fund, or a similar type of fund, over a full market cycle, which is at least five years. If the fund has been doing well and the management team has been in place for some time, an investor can get an idea of the type of investing they do. However, if the fund has new management, they may look at the management’s prior performance, and not just the performance of the fund, as the new management may change the investing philosophy.

3. Focus or philosophy of fund

Third, you may want to invest in companies that focus or specialize in a particular industry or sector of the economy or region, such as high tech companies or Far East funds, for example. You may also wish to invest in funds with a particular philosophy, such as protecting the environment or preventing cruelty to animals, by investing in ‘ethical’ or ‘green’ funds.

4. Performance of fund

Of course, when deciding which fund to invest in, it is only natural to consider the funds performance. However, the investor should consider the overall performance of the fund, as well as how it is performing in comparison to the market. Looking at just the recent performance may give an over inflated or under valued impression of the fund. Generally, a consistent, above average annual performance is desirable.

5. Fees and risk

Fifth, you should consider what fees the company charges for managing the fund, and what commissions or fees are charged by the Investment Advisor that sells you the funds. Funds are usually sold on a load or a no load, no commission basis. A fund with a front load means that you are charged when you buy the mutual fund. A fund with a back-end load means that you are charged when you redeem your units (or shares). Most funds also charge monthly management fees.

It is also important to decide what level of risk you want to take with your investment.







								

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