Many investors look only at the track record when choosing a mutual fund. This is a big mistake. The warning that all investment companies give – “past results are not guarantee for further profits” – is there for a reason. Past performance is only one factor that you should consider when selecting a mutual fund.
If you want to pick a really successful fund, you should evaluate a combination of several criterias.
Here is a quick suggestion:
1. Past results. Of course! It’s not the only factor, but remains one of the most important factors. The higher the average yearly results are, the better – if you are ready to accept the higher risks.
2. Longivity. Since how long is this mutual fund in the market? You may think the longer is the better. Generally yes, because it means lower risk. But if you are looking for more aggressive opportunities, consider investing in younger mutual funds.
3. Size. The companies who manage large investment amounts are less liquid. Such funds are usually safer, but can’t offer too high returns. In case of market crash, such funds are unable to cash out fast enough because of the size of their positions. Generally I prefer smaller funds, because they give more opportunities.
4. Company reputation. What do websites, magazines, newsletters and independent advisers say about the company offering the fund? If most people are happy or unhappy, they probably have good reasons for that.
5. Market segment. Is the fund investing in regions with emergning ecomony? If it is specialized in certain industry, what’s the future of that industry? Mutual funds are long term investment – so thing long term when evaluating them.
There are hundreds of factors one should consider when picking a mutual fund. That’s why there are so many companies who provide mutual funds evaluation and even charge for that. But in most cases, considering the five factors listed above can help you enough to achieve good results.
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