Any investor must understand the need for a diversified portfolio. Diversification, however, can take many forms. Equities, commodities, bonds, treasuries and mutual funds are all a general option in this regard. The question is what portion of allocated funds. This individual choice is a hard one but one that needs to be made as a responsible investor. Individual circumstances dictate differing answers to the question. Mutual funds, however, offer one part of the answer. These diversified investment opportunities come in many forms and are directed at many differing investment opportunities. Choosing a mutual fund that works for a particular circumstance is difficult, but in an overall way offers an option that lets those with experience make the choices for one part of a less experienced investor’s portfolio.
In a general sense, this suggestion hinges on what the needs, wants and requirements of that investor. Is the investor older, younger or prone to risk? Mutual funds cater to each of these particular needs and a host of other requirements. Understanding the direction of need is the first step as an investor assesses which mutual fund may be right for their needs. Risk is perhaps the largest aspect to consider. Most mutual funds are spread across many companies to reduce risk but generally operate within a certain class.
One must remember, however, that the investor is investing in the mutual fund’s performance and not, generally, in the companies that the mutual fund is investing in. This is a key point to remember, but one that needs to be balanced by the companies that the fund invests in as those companies dictate how the fund’s price changes. Leaving this point, if one is interested in mutual funds as a diversification tool, make sure to ask about fees. In this regard the lower the better with under 1.5% as a rule. Under 1% means that the fund is better run with a lower overhead.
So the question is raised, which and where. Past economic events have skewed the return rates as a comparison but do indicate some mutual funds that have done better than others. Negative returns in this current economic environment may appear negative but, in a general way, are not overly pessimistic as far as they relate to the performance of the mutual fund. The astute investor will understand that a time series needs to be addressed before investing in any mutual fund investment but also that, over time, returns are solid and derived from people that make their business the business of investing. Choosing the fund to participate in is the trick and one that an investor should be confident with for the long haul.