Put simply, actively managed mutual funds are the result of the work of their managers. It’s the manager that researches the huge number of investment products available and then chooses and buys the ones that best reflect their investment style.
As an investor, you are paying for their strategy, smarts and style. Here are a few key pieces of information you should know when investing in a mutual fund:
When you put money into a fund you get the advantage of affordable diversification. A mutual fund is a collection of stocks and/or bonds. Because your money is spread out over a number of investments, so is risk. The manager will move assets in and out of investments to try and produce a strong rate of return. Diversification is critical for long-term success.
Approach purchasing a mutual fund the same way you would hiring an investment advisor. When you buy a mutual fund, you want to understand the style of the managers. Are they value, growth or GARP investors (see What's Your Investment Style? blog)? Remember, you are buying the fund because of the manager’s style, so it should be in alignment with your own. For example, if you are a growth investor looking for high returns, then you’ll likely want to buy a fund (and manager) that invests primarily in stocks. You’ll also want to look at their track record and experience. Have they been through a recession and how did they do?
Understand the costs. The Management Expense Ratio (MER) is the management fee plus costs associated with the running of the fund. What the mutual fund manager is paid for actively managing the fund, makes up part of the management expenses of the fund.
What’s the fund manager’s philosophy? Do they have a negative perspective on the markets? How does this impact the investments they choose? Are they more conservative than you may like? This really comes down to is the glass half full or half empty and do you agree?
It’s not a bad thing to be conservative, but sometimes that strategy gets you in trouble. The converse is also true. It’s not always a beautiful day. I don’t think you can ever be all positive or all negative. You have to go where the facts take you and you have to be able to change.
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read all articles in Allan Small's Prime Earning Years Series ----------
What's Your Investment Style?
Why Is It So Hard To Buy Low & Sell High?
Why Do People Say: When You Purchase A Mutual Fund, You Are 'Buying' The Fund Manager?
Diversification Does Not Mean Buying As Many Investment Types As You Can
Is Gold A Safe Haven?
The Impact Of World Events On Investing
Nervous About Retirement?
When The Market Falls, What Should You Do?
How To Reduce The Cost Of Investing Without Sacrificing Returns
Make Sure You Have An Investment Strategy