Investors often select a mutual fund by evaluating the past performance, only to be disappointed later with the fund when it does not meet those expectations. While it is important to evaluate historical performance, it should not be the only factor when selecting a mutual fund.
The first step should be determining your financial goals. You may have short term goals such as paying for a wedding or establishing an emergency fund or you may have long term goals such as retirement or paying for a child’s college. The goal of your mutual funds should match your goals. Establishing a time period to meet your goals will help you determine the type of investment to make. For example, a shorter time frame should be for conservative investments, while a longer period allows you to be more aggressive.
Understanding your tolerance for risk is also important when selecting a mutual fund. Markets go up and down and you can lose money in any investment. There may also be other risks which may apply to specific funds, including inflation, interest rate, credit, sector, liquidity, currency and political risks. By becoming familiar with the different risks involved with various funds, you will be able to determine which fund is best for your own personal tolerance for risk.
Before investing in a mutual fund, you should obtain a prospectus on the fund and consider carefully the fund’s investment objective, charges, expenses and associated risks. The prospectus, which contains this and other important information, is available through an investment professional or by contacting the fund directly. It should be read carefully before investing or sending money. It is important for you, as an investor, to understand the investment return and principal value of an investment in a mutual fund will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. As with any investment decision, it is important to consider a number of factors before making an investment in a mutual fund.