A varied collection of profitable mutual funds can prove to be an excellent means of amassing wealth for an investor. However, nominating the right funds to invest your capital in can be a daunting undertaking. Luckily, selecting the right funds isn’t all that difficult as all well-performing funds can be seen sharing particular characteristics.
1. Low charges, fees, and expenses
Mutual funds that boast lower expense ratios will generally be more attractive, and investors need to consider the fact that low expense ratios do not indicate low performance. The opposite is often true, with the best performing funds in a particular category offering expense ratios below category average.
Along with the basic expenses that all funds charge, some will also impose ‘load’ charges, or sales fees that can be as high as 6-8%, while some may also levy fund advertisement and promotion fees referred to as 12b-1 fees. With a number of funds that have a no-load policy and do not charge promotion fees either, investors in mutual funds should not find themselves paying all these additional charges if the right funds have been opted for.
2. Consistently well-performing funds
A majority of investors invest in mutual funds to form a part of their retirement plan. For this reason, investors should assess the fund’s long-term performance and profitability and not make rash decisions because a fund performed really well in the past year. The most profitable funds aren’t those that generate the highest returns a particular year, but those that produce considerably good returns year after year over a long period of time.
The longer the fund has been in operation, the easier it is for potential investors to assess its profitability and examine the efficiency of its management during a downward market cycle. Funds that are most profitable in the long-run will be those that can efficiently minimize losses during trying economic conditions.
3. Strong investment strategy
The fund that is controlled by a solid investment strategy will most likely perform remarkably. Potential investors should, therefore, look into the investment objectives of the fund and the manager’s proposed strategy to achieve those objectives.
Investors should also be able to recognize and be cautious of the ‘portfolio drift’ phenomenon. This is when the fund manager steers off-course from the detailed strategy so much that the fund’s original goals change considerably. The fund manager should clearly communicate to the investors the reasons for any changes in the fund’s investment strategies, if such a thing does occur.
4. Good reputation and trustworthiness
The safest mutual funds to invest in are those established and offered by notable names in the business with a proven track record, like Fidelity, the Vanguard Group, and T. Rowe Price and Company. Firms that have a transparent operational policy regarding their objectives, strategies, and fees and charges are the best ones to do business with.
5. High asset reserves, but less money
The funds that are heavily invested in but do not boast a large quantity of assets will generally perform better. Funds that display good performance will draw more investors enabling them to acquire more investment assets. With continuous growth, however, there will come a point where the total assets under management (AUM) of the fund will grow to be so large that their management becomes a hassle. The demand pressure that results in the market from the fund’s big purchases could drive the stock price considerably higher, making it not as big a bargain as the manager would have hoped for it to be. Similar problems may also be faced during a fund’s liquidation.
Investors should keep in view their personal goals, what they want from their investment, and the level of risk and uncertainty they’re comfortable with when selecting mutual funds to invest in. These basic guidelines aim to make the assessment and the decision making process clearer and easier for potential investors, hopefully leading to the acquisition of a profitable fund portfolio.
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.