How To Evaluate And Select Mutual Funds.

Investors can use mutual funds to build wealth over time. A mutual fund is an investment that pools money from individual investors and invest it in a diversified portfolio. Compared to stocks, mutual funds offer investors more diversification and less volatility. But how do you evaluate a mutual fund? Here are just a few basic things to take into consideration when selecting mutual funds for your portfolio.

​There are many factors to consider when selecting mutual funds to invest in. Without further delay, here are 6 of the many parameters to take into account.

1. Mutual fund's performance

A mutual fund's performance can give you a good idea of a its financial health. We typically look at a fund's performance over the last 1 year, 3 years, 5 years and 10 years. A fund with a consistent, acceptable or solid performance is one we would feel comfortable investing in. Also, we look at a fund's performance for the current year (YTD performance).

2. Expense ratio

The expense ratio is another important factor to consider when selecting a mutual fund. In very basic terms, the expense ratio tells you how much the fund charges annually to operate it, among other expenses. It is usually expressed as a percentage. For example, an expense ratio of 0.50% means that you pay $50 for every $10,000 you have invested in that fund. If you have $50,000 invested in that fund, you can expect to pay about $250. As you can see, it is prudent to select a fund with low expense ratios. Use this simple tool to estimate your mutual fund fees and expenses.

3. Minimum investment amount

Some funds require a minimum investment amount (e.g. $2500, $3000). This amount varies and depends on the broker, fund manager, investment strategy, among others. Other mutual funds have no minimum investment. We recommend a mutual fund with no minimum investment for any new investor, as you can start investing with as little as $1!

4. Overall rating and returns

You can evaluate a fund by looking at its overall returns and ratings. Funds are rated on a star scale, ranging from 1 to 5 stars. Returns are classified from low to high.

5. Net Asset Value (NAV)

The NAV or net asset value of a mutual fund is the dollar value of one mutual fund's share, excluding other fees. If the NAV of mutual fund X is $10.45, it means you need $10.45 to purchase one share of mutual fund X.

6. Mutual fund's top 10 holdings

A mutual fund is composed of a basket of individual stocks of different companies. Mutual funds can have anywhere from tens to several hundreds or thousands of stock holdings. The top 10 holdings of a mutual fund is usually listed to give you an idea of where the fund invests a good portion of its money in. This can give you relevant information about the mutual fund's financial health or investment strategy. 

The bottom line

Investing in mutual funds is a good way to build a diversified portfolio and minimize risks. When selecting a mutual fund to invest in, there are many important factors to consider. For a novice investor, a mutual fund's performance, expense ratio, investment minimum, overall rating and returns, net asset value (NAV), and the fund's top 10 holding, among other things, should serve as a good starting point. An investor is encouraged to evaluate all the aforementioned parameters before selecting a mutual fund. Now that you have a basic knowledge about what to look for when evaluating a mutual fund, let's put it all together by looking at a specific mutual fund.

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