Finding the Best Mutual Fund For Your Money

Mutual funds have increased in popularity immeasurably over the past one hundred years. Though the mutual fund was seen primarily as an instrument for the rich at first, today they allow many average individuals the chance to earn a decent return on their money. This article will examine how to choose a mutual fund that will deliver superior returns over the long term.

The first thing that you need to consider when evaluating any potential investment is what are the opportunity costs of the particular investment. If you are planning on putting money aside for a mutual fund, you need to be certain that the money can not be better served somewhere else. For instance, if you have a significant amount of consumer debt, it is usually advisable to use monies to pay down that debt rather than invest in a mutual fund.

If you have determined that the best course of action is to invest for your future, then you are ready to take a look at the mutual fund landscape and determine which fund meets your objectives. Because the primary objective of investing your money is to earn a return that exceeds what you might receive in a guaranteed investment vehicle such as a government bond or certificate of deposit, there are several metrics that you need to familiarize yourself with.

The first of these metrics is the expense ratio of the fund. All funds charge a percentage of the assets under management as their fee. In an actively managed mutual fund, meaning that fund manager picks and chooses stocks in order to try to earn a market-beating return, the expense ration can be pretty high. If your fund carries an expense ratio of 2.5% it will need to outperform its benchmark by 2 percentage points if the index for that benchmark carries a 0.5% expense ratio. This is significant. You see, most managed funds do not outperform their benchmark over the intermediate term and a 2% annual out-performance is often rare.

For this reason, it makes sense in many situations for a person to simply invest in an index fund such as the S&P 500 rather than pay a mutual fund manager to try to beat the market. Beating the market is fairly rare for the professional fund manager, as 75% of fund managers will actually under-perform the market in a given year.

Another consideration that you should keep in mind is the type of holdings that the fund will be invested in. If you are interested in receiving income from your mutual fund then you will want to be in a fund that is invested in securities with a significant dividend yield. If, on the other hand, you are more concerned with performance, then the dividend potential of the mutual fund may be of less importance to you.

Considering these factors, it is important that you do your homework before you commit to buying a particular fund. The fact of the matter is that you want your money to work for you, so researching your investments in a prudent strategy.

Alex writes about a variety topics related to personal finance and money management. He maintains a blog where his opinions on these matters are available for free. Please visit for more information.

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