Additionally, investors should contemplate the goal of risk tolerance. Will you as an investor be able to manage and rationally accept huge swings in portfolio value? Perhaps a more conservative investment is warranted. Analyzing risk tolerance is as vital as choosing a goal. Ultimately, what value is an investment if the investor cannot sleep at night?
To prevent these sales fees, keep an eye for no-load funds. These will not charge a front-end or back-end load fee, be aware other fees in a no-load fund. A good example is the management expense ratio as well as other administration fees, as they can be rather high. Several other funds charge 12b-1 fees, which are included into the share price and are utilized by the fund for sales, promotions and other activities associated to the distribution of fund shares. These fees come right off of the disclosed share price at a proposed point in time.Accordingly, investors are at times not aware of the fee at all. The 12b-1 fees by law can be as much as 0.75% of a fund’s average assets annually. An important tip when analyzing mutual fund sales literature, the investor should be attentive for the management expense ratio. Actually, that one number can benefit in clearing up any and all confusion as it relates to sales charges. The ratio simply is the total percentage of fund assets being charged to cover fund expenses. The higher the ratio, the lower the investor’s return will be at the end of the year.
- Did the fund manager deliver results that were in keeping with general market returns?
- Was the fund more explosive than the big indexes (did it’s returns change drastically throughout the year)?
- Was there an extremely high turnover (which may result in bigger tax liabilities for the investor)?
This information is imperative since it will give the investor awareness into how the portfolio manager reacts under certain conditions, and what the trend has been in terms of turnover and return. Just remember, past achievements have no guarantee towards future results. So before buying into a fund, be sure it makes sense to look over the investment company’s portfolio to examine any information regarding anticipated trends in the market for the years ahead. Most of the time, a impartial fund manager will help the investor with some sense of the prospects for the fund and/or of it’s holdings throughout the year(s) in the future as well as let you know about general industry trends that could be helpful.
Size of the Fund Normally, the amount of a fund does not slow down its competency to meet its investment goals. Moreover, there are situations when a fund can be too big. Back in 1999, Fidelity’s Magellan Fund, topped $100 billion in assets and they were forced to adapt its investment procedure to accommodate the large daily money inflows. Rather than being smart and purchasing small- and mid-cap stocks, it changed its center of attention largely towards larger capitalization growth stocks. As a result, its performance suffered. When should you worry that big is too big? There are no benchmarks that are definite, however that $100 billion mark really makes it hard for a fund manager to get a position in a stock and dispose of it without dramatically running up the stock on the going up and pushing it on the way down. It makes the procedure of buying and selling stocks with any kind of obscurity almost impossible.
The Bottom Line Choosing a mutual fund seems like a frightening task, just know your objectives and taking a chance is half of the battle. Be sure to follow this tip of due diligence prior to selecting a fund, you will increase your chances of success.