Investing? How to Choose the Right Mutual Funds

Karen Riccio

Disclosures

June 08, 2016

In This Article

What Do You Want to Do With Your Money?

Choosing an investment vehicle to make your money grow is very much like shopping for a car. A thrill-seeker might want a flashy model that accelerates from 0-60 mph in less than 3 seconds; a parent focused on safety probably seeks a comfortable, sturdy SUV.

The same criteria apply when choosing tools to invest your hard-earned money. Although individual stocks can deliver hefty gains, they're also capable of serving up disastrous losses. Remember: Potential high reward brings high risk. Unless you can analyze a company's financial sheet and can watch share prices like a hawk, you should probably steer clear of them.

On the other end of the risk spectrum lie bonds, certificates of deposit, money markets, and some dividend-producing products. These investments are very conservative, with low risk, and are primarily used to generate income when stocks falter or as part of an asset allocation strategy. Watching your money grow in only these vehicles is like watching mold grow on bread—especially in today's low-interest environment.

Aside from some of the newer vehicles, such as exchange-traded funds, that leaves mutual funds. With more than 10,000 mutual funds available in 2015—which includes 8361 no-load funds, according to the Investment Company Institute[1]—you have plenty to choose from.

Mutual funds encompass more than $16 trillion in assets. That's more than any other investment vehicle, and for good reason. About $4 trillion reside in mutual funds in retirement accounts [401(k)s] and offer a great opportunity to gain exposure—and even beat—the broad market and create diversity in a portfolio.

"Mutual funds still serve a vital role in many investors' portfolios as an easy way to access a diverse pool of stocks or bonds," said David Fabian, managing partner for FMD Capital Management, LLC.

A mutual fund is basically a pool of investments, professionally managed, that offers broad exposure to domestic or international stocks, bonds, or a blend—all with a lesser degree of risk than owning individual stocks.

Mutual funds all have five-digit ticker symbols that end with the letter "X". For example, FDEGX is the ticker for Fidelity's Growth Strategies Fund, and ESPAX is the Wells Fargo Special Small-Cap Value Fund.

How do you choose the funds that will be best for you and your goals? Although the thought of shifting through thousands of mutual funds may seem daunting, it doesn't have to be. If you apply certain criteria, such as costs to buy and sell, management fees, and performance compared with peers, you can substantially whittle down that number.

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