7 Ways to Choose a Good and Profitable Mutual Fund
If you decide to choose mutual funds as an investment strategy but don't know how to start, it's actually quite easy by doing research on yourself. As a reference for you, here are some ways to choose good and profitable mutual funds.
By thoroughly testing yourself, you are actually half way in the right direction when it comes to investing by understanding your risk tolerance and clarifying your investment goals.
Choosing good and profitable mutual funds is not too complicated. It involves choosing mutual funds that provide good return rates with low costs.
Even the chosen mutual funds are considered "winners" when they are able to strategically increase your portfolio and investment goals.
If you are ready to choose some mutual funds, there is a good way to analyze them, such as looking at past performance, management team, and expenditure ratios.
In addition, you can also expand your investment strategy by choosing the right mutual funds by diversifying your portfolio with international mutual funds, buying index mutual funds, and so on.
Guide on How to Choose a Good and Profitable Mutual Fund
Start with your Investment Objective and Risk Tolerance
As an investor, you have the option to choose from thousands of mutual funds from a variety of asset management companies. With so many mutual fund options to choose from, setting personal investment goals can help focus on the right mutual fund for you.
Ask yourself the following questions to gain insight on your investment goals:
- Are you seeking current income or long-term appreciation (capital gain)?
- Is the money needed to fund higher education or saved for future retirement?
In terms of risk tolerance, it's important to decide your current stance, namely:
- Can you tolerate an investment portfolio that may experience extreme ups and downs?
- Are you more comfortable with a conservative investment strategy?
Finally, consider the best time horizon for your investment, or how long you need to invest the funds:
- Do you need the funds to be liquid in the near future?
- Can you invest the money for a period of years?
If you invest in a mutual fund with sales charges, these fees may increase if you invest for a short period. A minimum investment time frame of five years is an ideal time for you to balance out these costs.
Look at your Expense Ratio
This cost ratio should be scrutinized as it may ruin your investment plan. Calculating your personal expenditure ratio can make it easier to decide on the right portfolio for you.
Of course, money is needed to invest in mutual funds. Things like management consultation fees, basic operational costs (photocopying documents & supplies, etc.), known as the expenditure ratio, must be properly managed. Before investing your cash, consider these things.
Simply put, it is the cost of ownership in a mutual fund. Think of it as the amount that needs to be earned to break even before you can begin to grow your investment.
Obviously, you want to have a mutual fund with the lowest expenditure ratio possible. For example, if you have two mutual funds with expenditure ratios of 0.5% and 1.5%, respectively, the second mutual fund has a much larger hurdle before your investment is considered to be growing.
Over time, this seemingly small percentage can make a big difference in how your investment grows.
Avoid Mutual Funds with High Turnover Ratio
It's important to focus on the turnover rate, which is the percentage of the portfolio that is bought and sold each year for the mutual fund you are considering. The reason is simple: taxes.
Investing in a mutual fund with a high turnover ratio can impact the taxes that are imposed. Taxes will reduce the return you receive, so if the ratio is high, the profit is smaller.
Look for an experienced and disciplined investment management team
Today, it is very easy to access any information so it is not difficult to find information related to your investment management. If you get information about a portfolio manager who has little or no track record, consider withdrawing the investment.
The ideal condition is an investment management company that has a strong investment analyst/portfolio manager team. This team consists of individuals who are disciplined, talented, and professional, ensuring that they fulfill their responsibilities well.
Lastly, check if the investment manager has funds invested alongside the mutual fund investors. It is easy to pay lip service to investors. It is certainly different if they have their own capital at risk alongside their investment.
Have the same investment philosophy as you
Like all things in life, there are various philosophical approaches to managing money. Many people, like Warren Buffett, are value investors. Over time, this type of investor looks for investments that are believed to be traded at a large discount. This type of investor usually has a small number of investments per year, but over time generates a large return.
In the mutual fund industry, there are many investment management companies that specialize in this type of value investment. You should filter them well so that they match your investment philosophy.
Some investors believe in what is called "growth" investing. This means buying the best assets, companies with the fastest growth, regardless of price. Others believe in investing in mutual funds in blue-chip companies with healthy dividends.
It is very important for you to find a mutual fund or group of mutual funds that have a similar investment philosophy.
Know the Right Benchmarks for Your Mutual Funds
Each mutual fund has a different approach and goal. That is why it is important to know what to compare to determine whether your investment manager is doing a good job.
For example, if you have a mixed mutual fund with 50% assets in stocks and 50% in bonds, you should be happy to get a return of 10% or even more. Match the risk taken with the capital you have, you can get a good return.
Do Asset Diversification
World-class investor, Warren Buffet, who is known for concentrating his assets on a few major investment opportunities, says that for those unfamiliar with the market, diversifying assets makes a lot of sense.
It is important to know that if you do not have the ability to do intrinsic valuation of a company, then spread your assets across various companies, sectors, or industries. Having four different mutual funds focused on the financial sector, for example, is not an example of asset diversification. If something hits the market, for example, the collapse of the real estate industry, your portfolio will also be hit.
So, how is diversification considered good? Here are some basic guidelines.
- It is best not to have mutual funds placed in heavily-industry/sector-weighted sectors. If you still do, make sure not to invest all your money in the industry.
- Don't keep all your investments in the same mutual fund group. Spreading assets across different companies can reduce the risk of internal turmoil, ethical violations, and other domestic problems.
- It is best not to just think of stocks. There are also several types of mutual funds, such as fixed income mutual funds, bond mutual funds, money market mutual funds, and so on.
