5 Essential Points to Consider When Buying Mutual Funds

If you are looking to start investing in mutual funds, one of the most misleading myths is that there is no work involved on your part. While a financial planner or investment adviser might make recommendations and explain what makes one investment fund more suitable to your goals than another, the final decision will ultimately come down to you, your feelings about the investment and whether you believe the investment itself is worthwhile. With that in mind, here are the five most basic things you need to consider before buying into any type of investment fund:

1. Assets Under Management. The larger the assets under management, the more money the fund has been trusted to manage. This could be a good thing or a bad thing. It is a good thing because it shows that a lot of people have trusted this manager and fund company to manage their wealth and generate returns. It could also be a bad thing because the larger the fund, the more complex it becomes in terms of management.

2. Expenses. Represented as a percentage, the expenses (or expense ratio) tells investors how much the fund spends. The lower the expenses, the better as it shows that the fund company is managing the fund's budget properly. High expenses could mean huge salaries and the higher the expenses, the more money the fund needs to make in order to keep up with or exceed what its competitors are earning its clients.

3. Holdings. One of the most important things you can do is take a cursory look at how the fund invests the money it manages. If there is something that does not sit well with you, you might better off finding another fund or asking for another recommendation from your planner. There are no "right or wrong" sectors, but if you are not comfortable with one or several, keep in mind that there are literally hundreds of other funds that will meet your needs and maintain a similar if not better performance record than the fund in question.

4. Performance and Rating. The track record of the fund says a lot about how it is managed. This will coincide with the fund's rating, such as a Morningstar rating; you will seldom see a fund with great performance but sporadic ratings, just as it is unlikely that the performance and rankings will not coincide with management shifts. Look at all performance periods to get a feel for how the fund performs in the short, medium and long terms.

5. Asset Class. Although investment funds are well known for their ability to offer tremendous diversification, they normally fall into a specific asset class -- cash, fixed income or equities/growth. Make sure that the fund you are looking at fits in your asset allocation model and does not disrupt the balance.

These are just five of the most basic considerations you need to keep in mind when evaluating whether to purchase an investment fund. make sure that you spend the time (about ten to thirty minutes) evaluating a fund based on these areas and you will not only be happier with your decision, but with the investment overall.

--> Consider some of the Small Cap Funds reviewed at the Mutual Fund Site.org.

Chris has more than 17 years of financial services experience. As a contributor to the Mutual Fund Site, he not only writes about Small Cap Funds, but also about Dividend Funds, one of the hottest topics in the investment world today.