Five Tips for Avoiding Pitfalls in Mutual Funds

Mutual funds are the ideal investing tool for the majority of Americans because they are accessible to just about everyone and they offer you a wide variety of choices.

Despite these benefits, there are several pitfalls every investor should avoid when placing their hard earned money into a mutual fund.

Here are five useful tips I have followed when it comes to investing in mutual funds.

Make Investing Automatic

Hen it comes to investing in mutual funds, automatic payroll deductions are the best way to go. Not only will you be able to ensure you invest a set amount deducted from your paycheck, you will reduce your current income tax bill.

After a month of automatic deductions, I began to forget about the extra money being taken out and planned my budget around the new amount.

Periodic Follow-up on Mutual Fund

Remember your mutual fund is a long term investment and you should treat it as such. It can be mind boggling if you check the mutual fund every day. On the flip side, you will not be doing yourself any favors by simply investing the money into the mutual fund and forgetting about it.

To make the mutual fund work for you, you should review the performance of it on a monthly or quarterly basis. This way you can see if you should adjust your investments or where it is allocated.

Diversify the Asset Allocation

Even though the mutual funds are made of ten to twenty various companies, people fail to realize that they all belong to a particular sector or index, like small capitalization stocks or growth stocks.

You would want to make sure your mutual funds cover a wide variety of indexes and sectors, along with various asset classes, like stocks, bonds, or cash equivalents.

The reason behind this theory is to protect your overall investment. For example, say your mutual fund investments in the retail sector have bottom out, but since the mutual fund you own in the technological sector is on the rise, your overall portfolio is breaking even.

Keep Expenses Low

Whether the fees are for sales load, account fees, or management fees, every mutual fund has some in one form or another. It may seem trivial at first, but expenses in a mutual fund can add up quickly if you do not have a grasp on the fees when you first start investing.

Though the cost may eventually diminish, remember these fees will never disappear and it will always reduce the amount of your return from the mutual fund. This becomes even more apparent when the mutual fund takes a hard hit in the market.

Know Who Runs the Fund

When it comes to mutual funds, it is important to know who is running the show and their investment philosophy. Read the prospectus and research how long the current manager as been leading the fund.

It should throw up a red flag if the fund manager has been there for less than a few years. The more successful funds have results because they follow a consistent investing strategy that has proven success over time.

Resources

http://money.cnn.com/

http://www.morningstar.com/

http://finance.yahoo.com/funds