Taking the Mystery out of Mutual Funds
 
Mutual Funds can be an excellent investment opportunity for the people looking for a less risky investment than individual stocks. However, because there is still a risk involved in investing in mutual funds, it is wise to make sure that you have a complete understanding of the many types of funds there are and the fees that come with investing in mutual funds. For instance, there are five questions that you should ask before investing in any fund.

1) What has been the performance of the fund? When looking at a particular fund's returns for the last 5 years, the performance may look impressive. However, the best way to evaluate a fund's performance is by looking -- not just what that particular fund has returned, but by looking at other funds and indexes and funds that have a similar investing strategies. You'll see if the fund in question has out-performed or under-performed. This will give you a better idea of the fund's real worth.

2) Who is the Fund Manager? The fund manager is the one who runs the fund and makes the investments. Choosing the right fund has a lot to do with picking the right fund manager. Not only is it important to know who is running the fund, but how long they have been the fund manager. Fund managers change and it is important to know if the success of the fund was due to the last fund manager or the current one.

3) How much does the Fund cost?  When it come to mutual funds, fees are like taxes, you have to pay them. How much you pay is up to you. You will find funds that have a front load and some that rear load.  Front loaded funds mean that you pay the fees when you purchase the fund. Rear loaded funds mean that when you sell your fund your fees are taken at the sale. I personally prefer the no-load funds. No-load funds do not have an upfront or rear end fees. However, you will pay fees that are buried in shareholder reports and taken right off the top of your returns. Not to worry because cost is one of the constants in investing. Just be mindful of what your cost are and when they are taken.

4) How much risk is involved? Just because you are choosing to invest in mutual funds does not mean that there is no risk. Usually the greater the return on investment the riskier the investment. With all investing there are some risk that must be calculated before investing. However, when it comes to fund investing it is always wise to look at the funds chart (weekly, monthly, and annually). this will give you a better idea of how volatile a fund actually is. Even though the fund may have a great return, you still want to see how volatile the fund may be. Volatility is a one of the best ways to tell how much risk you are investing in. Another way to tell of risk is to know what the fund is investing in.

5) What does the fund invest in and own? There are many different securities out there that a fund can own. Which particular securities that your fund holds can make the difference in small gains or large returns. When looking for a fund make sure that you know what type of fund you are buying and what it's five top holding are. There are different types of funds and each fund type uses a different investment strategy. It is very important to know what type of fund to invest in when thinking of returns, risk factors and investment strategies.

Learn about the different types of Mutual Funds