Learn How To Choose The Right Mutual Fund For Your Goals

Edited By yashovardhan sharma on Jun 13,2024
How to Choose Right Mutual Fund

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When you're ready to start saving up for retirement, you have many options. But not all of them are great. Risky, get-rich-quick stuff (yeah, looking at you, crypto) can wreck your retirement plans. On the other hand, "safe" things like gold and bonds won't keep up with inflation. That's why we're big fans of good growth stock mutual funds. Investing in mutual funds is a solid way to build wealth and retire with a nice cushion without all the stress and uncertainty. But this only works if you know how to choose suitable mutual funds.


Understanding Mutual Funds


the Right Mutual Funds

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Let's break it down. What are mutual funds? Think of it like a "pizza fund jar" in your kitchen. Every time someone in your family walks by, they toss in a few bucks. You all just mutually funded your next pizza night (yum!). It's as simple as that! Just like Pizza Night, with mutual funds, you join a pool of other investors. These pooled contributions are invested and managed by professional fund managers. Instead of buying stock in just one company, mutual funds contain stock (or bonds) from dozens, even hundreds, of companies. You're buying bits and pieces of many companies all wrapped up into one fund.


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Advantages of Mutual Funds

Some stocks go up; some go down. Owning stock in just one company is like putting all your eggs in one basket. It's super risky and creates an emotional roller coaster you don't want to ride. Since each mutual fund contains stocks from multiple companies, stock values may rise or fall for individual companies, but the fund's overall value should still go up over time. And as the value goes up, so do your returns! Not bad, right? But that's not the only perk of mutual funds there's also:


  • Instant diversification
  • Lower costs
  • Dividend reinvestment
  • Active and professional fund management


In the U.S. alone, $27 trillion in total net assets are held in just over 9,000 mutual funds$27 trillion. Each fund has its own investment strategy, risks, and rewards. So now, here's the tricky part: picking your mutual funds! Luckily, we know a thing or two about that.


How to Pick the Right Mutual Funds


How To Choose The Right Mutual Fund

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Diversify Your Investments

Your portfolio is like a mix of your investments. If you're starting, consider broad mutual funds covering different parts of the stock market. You can check out a market index like the S&P 500, which includes about 500 big U.S. companies. Your returns should match the index if you go for a mutual fund that tracks the S&P 500. But don't just stick to market trackers. Suppose you already have some broad market index funds. In that case, you can look into mutual funds focusing on specific regions (like Europe or Asia), different company sizes (small cap vs. large cap), or specific sectors (like oil, clean energy, or tech stocks).


Think About Your Investment Timeline

The closer you are to retiring, the more conservative investments you might want. Younger folks usually have more time to handle the ups and downs of the stock market. Over time, those fluctuations generally smooth out into a steady upward trend.


Know the Minimum Investment Requirements

Once you hit a mutual fund's minimum investment, you can usually decide how much more you want to put in. Minimums can range from $500 to $3,000, but some are as low as $100. Some even have no minimum at all. Figure out what you can comfortably invest in and go from there.


Active vs. Passive Investing

Do you want to try to beat the market or match it? It's a simple choice: one method costs more but often doesn't yield better results. Actively managed funds have pros in picking and choosing investments. It's tough to outperform the market consistently; even the pros rarely do it. So why pay more for possibly worse performance? Passive investing is more of a "set it and forget it" approach. Index funds follow a market index. Since they don't need a fund manager, they're usually cheaper and often perform better than actively managed funds.


Similar Reads You May Enjoy: Balanced Funds 101: A Guide to Achieving Financial Harmony


Common Mistakes to Avoid

Now that you know what to watch out for, let's discuss some typical mistakes people make when picking mutual funds.


Ignoring Expense Ratios and Fees

One big goof is choosing a mutual fund without getting what the fees or expense ratios do to your returns over time. Fees can differ if you go with a passive fund, which tracks an index like the S&P 500, or an actively managed one that aims to beat the market but costs more. Even if the fees seem tiny compared to credit card interest rates, they can cut your gains. Imagine you had $100,000 in a fund, making 7% a year. Sounds great, right? But those fees would impact your happiness with the final amount. Passive funds usually have lower fees and better returns, so they're often a solid choice. If you're leaning towards an actively managed fund, look for ones with the lowest fees and where the fund manager has a lot invested, too. They must have something to lose.


Not Balancing Risks with Bonds

Newbies often jump into mutual funds for long-term growth, which is why equity mutual funds are super popular. These funds track the stock growth of many companies by index, industry, or country. On the other hand, bond funds are less risky and are based on government or company debt. You lend money for a set time and get repaid with interest. Stocks might give you better growth over time, but bonds can help balance the risk by providing a steady income.


Neglecting the Importance of Due Diligence

Morningstar, a well-known investment research firm, has a list of mutual funds ranked from one to five stars. So, pick the one with the most stars, right? Not so fast, as this may be a mutual fund misconception. Morningstar itself says its star ratings are just a starting point. A high rating doesn't mean you should invest without doing more research. Use it as a first step, but make sure to dig deeper.


Relying Only on Personal Recommendations

So, who do you trust if you can't just go by a fund's performance? A lot of new investors turn to the people they know best. Even now, word of mouth is powerful, especially for big financial decisions. But unless your friend, coworker, or family member is in the same economic boat as you, experts say there's a good chance the fund they suggest might not be the right fit.


Going Only After Hot-Performing Mutual Funds

Chasing after top-performing funds usually backfires: you buy when returns are high and sell when they drop. It's like playing a pricey game of whack-a-mole, hitting just as the hot performance cools down. Studies show that a fund's recent performance doesn't predict future returns. It would help if you also considered other things like its assets, fees, and what it holds.



Patience is the secret to a booming portfolio of good growth stock mutual funds. Don't freak out if the market dips, especially if you're in your 20s, 30s, or 40s (even your 50s and 60s). As Dave says, the market has bounced back from every dip. Put your phone down, turn off the TV, and take a deep breath. Don't let fear take over. Trust the proven process. Remember, you're in this for your retirement. This isn't a quick cash grab. You're aiming for long-term success. Stick with the Baby Steps and pick the suitable mutual funds, and you'll come out on top in the long run.

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