Choosing the Best Funds. With thousands of mutual funds to choose from and hundreds of different fund families offering them, choice overload and the potential to make needless mistakes exists. Without a doubt, no-load funds are the best choice for mutual fund investors. Once asset allocation has been established, begin choosing the best mutual funds for you and your investment goals. When choosing from a broad selection of mutual funds begin by using a fund screener, or simply comparing performance to a benchmark. Consider other important qualities of mutual funds, such as fund fees and expenses (see the Expense Ratio), and manager tenure, as well. Most importantly be sure to choose a diverse selection of funds which combine to suit your risk tolerance and investing goals.
Bottom Line on Buying Mutual Funds
Getting Started. Investing begins before buying the first mutual fund (or prior to buying the next one). If you’re investing independent of a financial advisor, ask yourself a few questions: What do you hope to accomplish with your savings? A secure retirement? Accumulation of wealth for strengthening your financial security? What is your time horizon? One year? Five years? 10 years?
Since most investors are buying mutual funds for the long-term, and most are moderate investors that want to take some risk to get higher returns (but not a high level of risk) we’ll focus on building a portfolio for this investment objective (long-term, medium risk). Here are some of the best funds to start a long-term portfolio:
S&P 500 Index Funds: Index funds can be a great place to begin building a portfolio of mutual funds because most of them have extremely low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund. As their name suggests, index funds simply hold the same securities that are found in an index. S&P 500 Index funds invest in approximately 500 of the largest U.S. companies. Index funds are passively managed, which means their primary objective is to mirror the holdings and performance of an index and therefore costs to operate these funds are extremely low. Therefore, you can meet the initial goal of getting a low-cost, diversified mutual fund when you buy index funds. For more on index funds, check out our Index Investing FAQ page. Again, mutual fund companies like Vanguard, Fidelity and T. Rowe Price are good places to find the best index funds. You can also look at Charles Schwab.
That said, a “no-load” fund is not free. All mutual funds have internal expenses. Part of your investment dollars will help pay the fund company, the fund manager, and other fees associated with running a mutual fund. These fees will often be made transparent to you and are taken out of the assets of the mutual fund. You should always take the time to consider all the various fees and charges when investing in mutual funds.
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