How to Choose the Right Mutual Funds
from daveramsey.com on 19 Mar 2013
When Dave talks about mutual fund investing for retirement, he always says to choose “good growth stock mutual funds.” But with thousands of funds to choose from, how do you know which ones fit the bill?
Mutual funds are like people. The only way to separate the good ones from the stinkers is to get to know them. But unlike people, you can find all the important information about a mutual fund on its printed prospectus or online profile. Here are six important features you’ll need to review as you select funds to invest in:
This is a summary of the fund’s goal and the types of investments it will make to achieve that goal. Look at funds that fall into one of the four categories Dave recommends: growth, growth and income, aggressive growth, and international.
Fund Manager Experience
As with any job, you’ll want an experienced manager calling the shots for your mutual fund—someone with at least five to 10 years of experience. Keep in mind, though, that many managers mentor their successors for several years. So a fund with a new manager can be worth considering if the fund has consistently performed well.
Sectors refer to the types of businesses the fund invests in, such as financial services or healthcare. A balanced distribution among sectors means the fund is well diversified.
Performance (Rate of Return)
You want a history of strong returns for any fund you choose to invest in. Focus on long-term returns, 10 years or longer if possible. You’re not looking for a specific rate of return, but you do want a fund that consistently outperforms most funds in its category.
Dave recommends front-end load funds in which you pay fees and commissions when you make your investment. It allows your money to grow without being bogged down by expensive management fees. Also pay attention to the fund’s expense ratio. A ratio higher than 1% is considered expensive.
Turnover refers to how often investments are bought and sold within the fund. A low turnover ratio of 50% or less shows the management team has confidence in its investments and isn’t trying to time the market for a bigger return.
Make the Right Choice With Expert Advice
If this sounds like a lot of information to dig through and compare, you’re right! The good news is you don’t have to do it all alone. You can work with an investing advisor who understands that you’re in charge of selecting your own retirement investments. One of Dave’s investing Endorsed Local Providers (ELPs) will give you the guidance you need to choose the right funds for your retirement plan. Contact your ELP today!