Investment in mutual funds

16th September: Investing in mutual funds can prove profitable provided you take care to exercise caution.

16th September: Investing in mutual funds can prove profitable provided you take care to exercise caution.

Mutual funds have become a common way for beginner investors to create a huge share of wealth. A mutual fund is a company that owns investments and has a portfolio manager entrusted with investing the money raised by the mutual fund in accordance with the terms laid in the prospectus.

More often, investors in mutual funds indulge in common mistakes.

However, exercising wisdom while making investments in mutual funds can help you save huge funds by the time you retire.

Let us see how—

• Never ignore the expense ratio—This is a common blunder committed by many investors in mutual funds. Investors are often unaware of the mutual fund expense ratio or the amount being paid by them as fees to the mutual fund management firm. As a rule of thumb, mutual funds investment must be in the bottom 10 percent to 20 percent of the expense ratios.

• Read prospectus of the Mutual fund—Reading the prospectus is indispensable before making investments in any mutual funds. The prospectus of the mutual fund management firm contains details of the investment strategy to be followed in investing your money apart from several vital clues.

• Take benefit of better mutual fund share classes—While investing in mutual funds, its best to take advantage of different levels of mutual fund shares that provide higher minimums with lower expenses.

• Never ignore sales loads—Any person wanting to invest in mutual funds should make it a point not to ignore sales loads since they are a raw deal. A sales load is a commission being paid by the investor to the company or the person who convinced for investing in mutual fund.

• Knowing underlying securities owned by your mutual fund—As an investor, you must have complete knowledge about the underlying securities including bonds or stocks owned by your mutual fund. Remember, owning a range of mutual funds with almost same underlying securities is not advisable.

So, now you know that the best and safest bet while investing in mutual funds in keeping your costs at the minimum. Investing in low cost index mutual funds is a good example of wise mutual funds investment.

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