In 2016, 44 percent of US households—or about 54.9 million—owned mutual funds in their retirement and investment accounts according to the Investment Company Factbook. The median amount invested in mutual funds is $125,000 making them a major component of many US households’ investment wealth.
Given that so many of us invest in mutual funds, it’s important to understand what they are, how they work and how to know if you have selected the right mutual funds that best achieves your goals.
In Think Like An Investment Advisor To Be A Better Investor, Nina Mitchell, Senior Wealth Advisor at Bridgewater Wealth provided a great primer about how to analyze mutual funds for your portfolio. In Part II, we want to arm you with questions that you can use to decide whether a specific mutual fund is a good investment for your portfolio.
The relevant questions differ slightly, depending on whether you are selecting and managing a fund on your own or assessing the quality of investments recommended to you by a professional such as a broker, investment advisor or financial advisor. Also, consider that performance is only one dimension of the benefits you receive from a particular mutual fund investment. Factors such as tax efficiency, risk, expenses, and deciding when to buy and sell contribute to the overall return and should be considered during your analysis of when and where to invest your money.
Let’s begin with a list of questions that apply to both do-it-yourself investors and investors who are working with a financial advisor or broker. These initial questions may help to determine the quality and appropriateness of the mutual fund you are considering:
Get the facts by reviewing a fund fact sheet
All of these questions can be answered by reviewing a fund fact sheet. If you are a do -it-yourself investor you can find the fund fact sheet online directly from the mutual fund company or through a security information source such as Yahoo Finance or Morningstar. If you are using an advisor, we recommend you request the fund fact sheets directly from them. Securities regulations intend that these fact sheets be understandable for an average investor, and mutual fund companies are required to include specific standard information in this document.
In addition to reviewing the fund fact sheet for each mutual fund investment, if you’re a do-it-yourself investor, ask yourself questions about the purchase, ongoing management, and selling process you’ll use for this investment. Start by considering the following:
For more information on how to construct an investment portfolio, read: Investment Soup: A Recipe for Financial Success
Investing through a financial advisor or broker
If you have hired someone to purchase mutual funds on your behalf, some important areas to explore include fees the advisor will charge (this helps determine the extent to which their advice may be biased by their own compensation) and whether they have a well thought out and consistently executed investment philosophy. We recommend you ask the following questions for each investment an advisor suggests for you:
Know what you own and why
Selecting a mutual fund may seem like a complicated task. You can simplify the selection process by starting with a clear understanding of your overall investment objectives and risk tolerance. Use that criteria to narrow the field of choice to only those funds that match your specific portfolio objectives. Then utilize these questions to help you select the fund that provides the best balance of performance, expenses, tax efficiency and liquidity. If you are outsourcing your investment process to a professional advisor, start by determining whether your advisor has a disciplined investment methodology and assess how that philosophy aligns with your long-term goals.
Being an informed investor will help you to stay in control of your investments and ultimately, the goals you want to realize over time.
Consider this your training manual to get and stay financially fit for life!