But the sheer number of them — almost as many as stocks on the Big Board — can be daunting to anyone looking to buy. Still, if you’re a do-it-yourself investor willing to spend a little time investigating your investments, you can find the right funds for you by remembering a few simple rules.
1) Know Thyself:
You can only buy a fund if you know a lot about yourself. How you allocate your assets can determine the size of your nest egg more than almost any other consideration. Before buying funds (or, indeed, almost any investment vehicle) you need answers to these questions: What is your savings goal? How long do you expect to keep the investments? How well do you tolerate risk? What’s your view of the future?
2) Price IS Important:
Chances are most fund fans don’t have a clue what their investment costs. There is no simple sticker that screams, “This is the price!” But costs are key to returns. So first, check in the fund prospectus for the most basic of charges: a load, essentially a sales commission paid to an investment broker or advisory. Then check out the fund’s expense ratio (the percentage of a fund’s assets deducted every fiscal year for operating expenses.) The average is near 1.3%, but it varies by category, and some funds are simply worth more than others. That’s because they have a phenomenal track record, which brings us to the next big piece of advice:
3) Check Out Track Record:
This really is where the rubber hits the road — how a fund performs. But one number doesn’t tell the whole story. You can’t simply choose the best-performing fund of last year because, more often than not, No. 1 funds are the most volatile sector type, and if you’re going to chase this year’s chart-topper, know that you may wind up in last place.
Instead, look at 1, 3, and 5 year average annual returns, and compare those numbers to their peers’ records. Morningstar.com is a good website to find these and other important tools. Also find out a fund’s track record during specific down times — how did it handle the few months after 9/11, for example, or when the Iraq war hit Wall Street.
This weekend our Business Block reveals the three BEST mutual funds out there. Tune in Saturday 10am — noon ET.
Brenda Buttner is the host of "Bulls & Bears" (Saturdays at 10 a.m. ET), and is a senior business correspondent for FNC. Her personal finance articles have been published in many popular magazines and newspapers including The New York Times and Ladies' Home Journal.