If you want to acquire a broad range of investments with just one purchase, mutual funds are the way to go. They're easy to buy, just as simple to sell, and rich in benefits and features. You will have to do your homework to identify which ones best fit your needs.
Get to know the basic makeup of mutual funds. Mutual funds are a portfolio that can contain a variety of securities, including stocks, bonds and certificates of deposit. Most funds have a specific focus or concentration.
Identify your investment goals. Specific objectives will help you determine the sort of mutual fund that best fits your needs. Do you need to pay for a college education? Fund your retirement? Buy a vacation home?
Determine how mutual funds fit into your overall portfolio. Like all investments, only a portion of your assets should be allocated to mutual funds (according to your plan). Determine that percentage and stick to it. Most mutual funds consist of stocks, which have more inherent risk than other investments. Younger people, for example, may hold a larger percentage of their assets in mutual funds, as their investing timeline is usually longer.
Evaluate your tolerance for risk and tailor your investments accordingly. If you're risk averse but you buy the most aggressive fund on the market, you're likely to be in for a string of sleepless nights.
Start your search. Most financial magazines have annual issues that rate mutual funds according to performance, risk and other parameters. Web sites such as Fidelity.com and Schwab.com have fund evaluation tools. Get a copy of the prospectus.
Investigate performance--in particular, a fund's long-term performance. For instance, Fidelity's well-known Magellan Fund has a 10-year average rate of return of 9.15 percent. Compare a fund's performance to an established benchmark, like the S&P 500. Also, companies like Morningstar (morningstar.com) rate mutual funds against others in their own class.
Check out a fund's expenses. Mutual fund costs are ultimately subtracted from proceeds to investors and are usually expressed as an expense ratio. Magellan has an expense ratio of less than 1 percent.
Get a sense of a fund's volatility. Compare one year's performance to the next. A stable fund will perform relatively consistently from year to year, while a fund with greater risk may go through highs and lows like a roller coaster.
Buy the fund through a financial adviser (you may have to pay a one-time fee) or the fund family itself, or use an online broker.
See who's managing a fund and how long he or she has been there. The current manager may not be responsible for all those juicy past performance numbers. Check out portfolio turnover. Every time the fund sells a stock, it generates a taxable return. The more a fund changes its mix, the greater your tax liability will be. Index funds are an excellent first step into mutual funds. These are passively managed funds that are designed to mimic the return of the market as a whole. While actively managed funds try to beat the market (sometimes they do, sometimes not), index funds strive for a reliable market rate return. They also have much lower management fees.
Avoid funds that charge a load. This is a one-time fee--often as much as 8 percent-- just to buy into the fund. You can find plenty of no-load funds that perform admirably.