To assess whether a mutual fund is the right fit for your portfolio, you need to weigh down different factors. Here’s a breakdown of five important questions that you should ask yourself before investing in a mutual fund. Consider them as a “before buying in a mutual fund” checklist. Let’s dive right in.
What does that mutual fund invest in?
Mutual funds invest in different asset classes – some invest in bonds while others invest in stocks. And each asset class has a different risk level. Hold on. What do you mean by risk?
What’s the risk level?
Risk appetite is one’s willingness to take financial risks in hopes of generating potential gains. From the very beginning, you should determine your risk level. For instance, are you open to tolerating significant losses in your portfolio’s value for the chance of greater long-term returns? This is a question worth reflecting on. See how risk averse you are and based on that pick a mutual fund that matches your risk level.
Generally speaking, mutual funds that invest in fixed-income securities such as bonds are less risky than funds that invest in stocks.
Types of mutual funds
There are different types of mutual funds, including:
What’s the investment strategy?
When it comes to investment strategies, there are endless possibilities. Yet, one of the most popular strategies is passive investing. The latter is an investment strategy involving purchasing a mix of diversified assets and holding them for the long term. The goal is to maximize returns and make wealth over time by minimizing the buying and selling. In other words, this investment approach follows the old saying: slow and steady wins the race. Mirroring the performance of a specific market index (Eg: EGX30) by investing in an index fund is a common way of following the passive investing strategy.
A great way of evaluating a fund’s strategy is to look up the management team. Who wouldn’t want a strong asset manager with a well-backed strategy, right? Also, make sure that the fund’s investment approach is in line with your investment goals/philosophy.
What’s the fund’s performance?
Lastly, research the fund’s overall performance in the past years. Sounds hard? Well, it’s very simple. You’ll look at the fund’s average annual returns- you can find the latter on the asset manager’s website. It can also be useful to look at the fund’s chart, to look at its performance over the past few years, and the rate at which the price fluctuates (aka volatility). However, this is only useful if the mutual fund has been operating for a while.
What are the fund’s fees?
Some expenses apply when investing in a mutual fund since the latter is managed by professionals. One of the factors to consider when choosing a mutual fund is the management fees. It’s advised to generally invest in a mutual fund with low management expenses.
The wrap-up
You can find the answers to all of these questions on the mutual fund’s website or prospectus, which is a document that gives you all the necessary details about a mutual fund such as potential risk and potential reward.
To wrap up, there’s no right or wrong here. A mutual fund might be suitable for your portfolio but not your friend’s. A good strategy would be to put your money in different mutual funds. It’s not this or that–it’s this AND that. Allocating your money to different mutual funds should be based on your preferences and the factors we just mentioned.
