Top 5 Things to Know About Mutual Funds (2016 Update)

Mutual Funds
Mutual Funds

5 Things to Know About Mutual Funds

If you have been keen about investing, then this wouldn’t be the first time that you hear the term “mutual funds.” It is a type of investment wherein some shareholders invested their money in diversified holdings. It is also considered one of the safest forms of investment as it is professionally managed.

To help you get a good start in your mutual fund investment, here are the five essential things that you should know.

 

1. Know the Risks in Mutual Funds

The scariest thing about investment is that there a lot of risks surrounding it. However, these risks come with premium rewards if everything goes well. In mutual funds, the biggest risk is to lose your capital caused by lower prices of your underlying assets. Thus, make sure you allocate your assets properly. Some of the risks that greatly affects mutual funds include price risks, default risks, liquidity risks, and credit risks.

Top Risks When Investing in Mutual Funds

A) Price risks
Prices change constantly. Hence, having a declining price in your shares and bonds are possible.

B) Default risks
This usually occurs when bonds in a certain company fail to meet its repayment obligations.

C) Liquidity risks
It is highly possible, especially when the market is close for a long time, resulting in the redemption of investments.

 

2. Check the Different Types of Fees

The great thing about mutual funds is that your investment is professionally managed by capable stock experts. But what do they get in return by helping you put your money in the right places? Mutual funds make their money through the charges and fees from their investors. These fees may come as a sales fee or load fee and administrative fee. If you want to avoid the sales fee, you can look for some no load funds. However, be careful with these types of funds as there might be management expense ratio or a high administration fee.

 

3. Find Out the Management Tenure

Find out if the fund management in your chosen funds is stable and reliable. Jumping from one manager to another raises a red flag in your funds. So, check the portfolio managers’ background before finally deciding on your investments.

 

4. Go for Diversified Investments

The beauty about mutual funds is that your investments are placed in diversified companies. A single stock has higher risks than a diversified one. This is because once this single bond encounters a problem, all your shares and bonds will be greatly affected. Some investors tend to increase their risks by taking large positions in single stocks.

 

5. Avoid any Assumption

Just because you are lucky in the first year of your investments doesn’t necessarily mean that the same thing will happen the following year. Remember, stocks are unpredictable, so don’t make any assumption. You still have to find ways how to step up your game to maintain the good return on your investments.


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