If you are looking to make an investment in mutual funds for the long term, you will need to consider a variety of different factors in order to be able to choose the mutual fund that is right for you.
You will need to decide whether your fund should be passive-managed or active-managed and think about the mutual fund expenses, among other things. Read our guide to find out what exactly should affect your choice.
Mutual fund expenses
Always check out the fees of a mutual fund before purchasing any shares. Depending on the fund company, the fees can delete any potential returns.
When purchasing shares of a fund, you may be charged a front-end load. This is a commission that is usually about 5% of the amount you spend on the fund investment. If you sell your shares within 5-10 years, there will be a back-end fee, paid at the time of the sale. These fees will decrease yearly.
Then there is the third kind of fee, which is referred to as the level-load fee. This fee is deducted annually from the assets you have in a fund. There are also the fund ratios, deducted annually to compensate the fund expenses, which include administrative fees, management fees, operating costs, and many others.
Passively-managed or actively-managed
Funds that are actively managed will have managers that make all the decisions about which securities and assets should be included in the fund. They perform research on different assets and take into consideration the company’s fundamentals, macroeconomic factors and trends. The expense ratio for these funds varies between 0.6 and 1.5%.
Funds with a passive management will usually only trade assets if the composition in the benchmark index was to change, resulting in lower costs. Passive funds nearly always have thousands of different holdings and a diversified fund. Also, since they are not trading as often as active funds, there is less taxable income. For most people, the passively-managed funds would be the best option.
Income vs. growth
Something else that needs to be considered is your goal for the investment. Maybe you want to create value from the assets in the fund. Of course, maybe it is income you want to generate, using the dividends and other interests.
Growth funds are all about capital appreciation. However, generally, these do not pay out any dividends. People usually participate in mutual funds for 5-10 years.
Bond mutual funds are the best if you are considering generating an income. They invest in bonds having a regular distribution. Using diversification is a great way to protect your portfolio from draw downs. They also have a much lower expense ratio, more so if they are tracking a benchmark index. Funds are also differentiated by time, such as short term, medium term, and long term.
Even though bond funds have a low volatility they still carry risks, such as credit risk, interest risk, prepayment risk, and default risk. But for reasons of diversification, it may be a smart idea to include bond funds as a portion of your portfolio nonetheless.
Did you find this guide useful? Ask us any questions you may have in the comments and read our mutual funds guide for beginners and learn how companies make money from mutual funds.
Need more advice? Don’t hesitate to check out our complete guide to investing into stocks and bonds and learn how to anticipate market movements and navigate the trading field.