HOW TO BUILD MUTUAL FUND PORTFOLIO?

HOW TO BUILD MUTUAL FUND PORTFOLIO?:

Decision-making factors: Before looking at the mutual funds available to you, it may be best to decide the mix of stock, bond, and money market funds you prefer. Some experts believe this is the most important decision in investing. Here are some general points to keep in mind when deciding what your investment strategy should be.

 

Diversify. 

It is a good idea to spread your investment among mutual funds that invest in different types of securities. Stocks, bonds, and money market securities work differently. Each offers different advantages and disadvantages. You may also want to diversify within the same class of securities. Diversifying can keep you from putting all your eggs in one basket and therefore, may increase your returns over a long period of time.

Consider the effects of inflation. 

Since the money you set aside today may be intended to be used several years down the road, you need to look at inflation. Inflation measures the increase of general prices over time.

Conservative investments like money market funds often may be popular because they are managed to keep a steady value. But their return after accounting for the inflation rate can be very low, perhaps even negative.

For example, a 4% inflation rate over a period of many years could erase a money market fund's 3% yield over the same period of time. So even though such an investment may give some safety of principal, it may not be able to grow enough in value over the years or even keep up with the rate of inflation.

Patience is a virtue. 

It's no secret—the prices of common stocks can change quite a bit from day to day. Therefore, the part of your account invested in stock funds would likely fluctuate in value much the same way.

If you don't need your money right away (for at least 5 years), you probably don't need to panic if the stock market declines or you find that your quarterly statement shows the value of your investment has fallen. In the past, the stock market has regained lost value over time. Although you are not assured it will do so in the future, try to be patient and allow your stock funds time to recover.

Remember the saying, "buy low, sell high." Switching out of a stock mutual fund when prices are low is usually not the way to make the most of your investment. Of course, if a fund continues to under-perform over time as well as your other fund choices, you may want to consider changing funds.

Look at your age. 

Younger investors may be more at ease with stock funds, because they have time to wait out the short-term ups and downs of stock prices. By investing in a stock fund, they might be able to receive high returns over the long-term.

On the other hand, people who are closer to retirement may be more interested in protecting their money from possible drops in prices, since they'll need to use it soon. In this case, it may be wise to place a greater percentage of money in bond and/ or money market funds, which may not have such large changes in value.

How can you determine an investment mix appropriate for your age? 

One way is to subtract your age from 100. The answer you come up with may be a good number to start with in deciding what portion of your total investments to put into stock mutual funds.

Risk. When you are choosing funds, be sure to consider how much risk you are comfortable with and how close you are to retirement. If retirement is around the corner, you may want a portfolio with very little risk. On the other hand, if you are younger, and have the time to weather the market's ups and downs, you may want to choose a more aggressive investment strategy. 

READ FUND DOCUMENT:

Your primary source of data concerning the mutual fund will be the prospectus. It is a legal document illustrating the rules and regulations that a mutual fund must follow and contains information on the fund's goal and strategy, risks, performance, financial highlights fees and expenses, and a wide variety of information that you should know before investing. 

What are the fund' s goal and strategy?

Goals vary from fund to fund, and they're important to understand so you can decide if they match your personal objectives. Some funds generate income for their shareholders, while others concentrate on capital appreciation. Some focus on a combination of the two, and others are oriented towards tax benefits or preservation of capital.

Funds also implement differing strategies to help accomplish their goals. The Goals and Strategies section of a prospectus details the types of securities in which fund managers can invest and how managers analyze them

Funds can be limited to domestic investments, focus on a certain country or region, or invest anywhere in the world. In addition, some funds invest only in specific industries or in particular types of companies. Others invest in large-, medium- or small-capitalization companies.

What are the risks?

As with all investments, each fund, whether domestic, international or sector specific, carries different risks. The Main Risks section of a prospectus explains which ones are associated with the securities in that particular fund, which may help you decide what level of risk you're comfortable having in your investment portfolio.

How has a fund performed?

While historical performance doesn't predict how a fund will do in the future, you may be interested in how it performed in past market environments. Depending on the age of the fund, a prospectus will provide its 1- 5- and 10-year average annual returns, including a comparison to its benchmark index over the same period.

What are financial highlights?

In this section a prospectus lists 5 years of annual financial information , if a fund is less than 5 years old, provides data since inception. Information includes net asset values at the beginning and end of each year, and details the gains or losses, dividends and distributions that account for any changes.

Financial Highlights also show fund asset information such as net assets ratios to average net assets for expenses and net investment income, and portfolio turnover rates.

What are the expenses of a fund?

Operating a fund entails some costs you should be aware of. The Fees and Expenses section breaks out these costs and who pays them. In addition, an example of fund expenses is provided to help you compare the cost of investing in one fund versus another.

Who's managing the fund?

In the Management section, a prospectus gives a brief biography of a fund' s managers, including how long they've worked on the fund and their overall industry experience.