Prior to mutual fund investments one should carefully think out the exact reason for his investment, and the kind of return he is expecting based on the market data analysis. The best mutual funds have low cost, a steady record of return to its investors and efficient fund managers who act upon facts and logic.
Whoever says that mutual fund investments are risk-free and dependable has either been lying or does not know much about its market behavior.
The idea that a mutual fund having an active returns record will ultimately result in profit is a myth. The best mutual funds retire with less money than the actual investment. An analysis done by financial researchers, between 1979 to 1998, shows a yearly under performance of 2.8% in their Vanguard 500 Index Fund. This worsened to 5.1% from 1984 to 1998. Such data are abundant. Yet mutual fund investments continue to happen.
This is because the best mutual funds are actively managed by highly qualified market researchers. Other index funds work based on passive management (by simply watching market adjustments).
Pick a mutual fund that has had a steady track record. Not all areas of its business need to yield a gain. Therefore, invest partially in different companies. An oil mutual fund is a good option due to rising world crude oil prices. Commodities which have a stable demand in the market are good investments. Also remember, that the market behavior and the business have little correlation. Therefore, do not be hasty and sell off all your investments due to a sudden drop in the market price. Learn to differentiate between a bull and a bear market. The investment strategy for each of these market structures is widely diverse.
Do not be fooled by advertisements that claim to be the “best mutual funds” in the market. There are over 8000 mutual funds to invest in. Use the advantage of a mutual fund investment: the fund manager, to take care of your investment opportunity. Also, do not always base your investment decisions on past ratings of a mutual fund. Every high-flying fund grazes the ground in future, and those that have poor return records are likely to continue having so.
Also calculate your investment and expectation of the return from it carefully. If you are planning to buy real estate, your investment amount will be different from what it should be if you plan to take a holiday instead. Also, the plan of action of a retired person looking for a steady income from a mutual investment will vary widely from a young employee who is just looking for a higher income opportunity. The former should try for fixed income funds or those that offer high dividends. But the latter (who will surely be looking to avoid a higher tax block) should look into currently growing companies.
Investing in mutual funds based on ratings is pointless since it does not reveal past of future performances of that fund. But consistency is a key factor in this type of investment.