A mutual fund is a great way to invest in the stock market without needing a large amount of cash to get started. A mutual fund also offers a terrific way to diversify your portfolio if you are an individual investor. Over the years mutual funds have multiplied and there are now thousands of mutual funds available for purchase. That isn’t necessarily a bad thing, but it does mean you need to do your homework before you purchase a fund.

Three Steps to Take Before Purchasing Mutual Fund Shares

1. Determine Your Objective- If you don’t know what you are looking to do with your money, there is no way to research mutual funds properly. Consider your personal financial situation and what you need this mutual fund to accomplish before you even start researching where to put your money.
2. Consider every single fee or expense that will be taken from your account-  There is a huge difference in the fee levels of mutual funds, and if you don’t find a fund with lower expenses you are really hurting yourself. Avoid funds with any kind of load, and make sure the annual expenses are less than the category averages. Remember, fees and expenses will quickly eat away from your earnings if you allow them to.
3. Mutual Fund Performance- The upside to having so many different mutual funds to choose from is that you should always be able to find a solid mutual fund that has a great track record on performance. Many investors simply look at what the fund has done in the last few months or year, but I think it is much wiser to look at the three, five, and ten year averages for mutual fund performance.

Buying a mutual fund is a good idea for most investors, but before you jump in with both feet make sure you take these three steps. These steps will help ensure that the fund you purchase is the right fit for you.

Many investors use a wide variety of strategies to try to help them get insight from the best minds on Wall Street, but often they overlook a fairly simple way of following some of the brightest minds out there. Look for the top mutual fund performers, through a venue such as Yahoo’s Mutual Fund Search and try starting out your search there.

For example, if you are looking for large cap growth stocks go to the large cap growth section of top performers and look at the top performers for different time periods. If you are a long-term investor it is usually best to take the closest look at mutual funds that have done very well over the 3 and 5 year period rather than something as short as a 3 month period. After arriving at the list click on the desired mutual fund and then look at their top 10 holdings. Yahoo shows you these as a % of the overall mutual fund portfolio, which is helpful because it helps you know just how much of a stake the mutual fund has in that particular stock. Look at some of the top mutual fund holdings and write them down or keep them in a word document and do further research on these names yourself.

By using this kind of a method what you are doing is you are getting a great starting point and free advice from some of the best pros out there. There aren’t many other ways on Wall Street that you can get advice from the best without paying a huge amount. Keep in mind that these holdings aren’t released immediately so this is definitely a method for long-term investors and not traders to use.

Start incorporating the research from top mutual fund managers into your investment decisions and get yourself ahead of the game.

Before you purchase your next mutual fund make sure you take a look at the mutual fund turnover ratio. This ratio measures the annual turnover of the stocks inside a particular mutual fund. Recent numbers show the average domestic stock mutual fund turnover ratio sitting somewhere around 80-90%. This means that the average stock is being held less than 15 months by most mutual funds.

High mutual fund turnover ratios are concerning for several reasons. Number one they should concern you because they will make your fees much higher. Let’s be honest, it costs money to make trades and when a manager continues to churn stocks they won’t be the ones paying for it, you will be! Also remember, high mutual fund turnover ratios are going to be a problem come tax time. The inefficiency of churning stocks is seen not only at the individual level, but also at the mutual fund level. Also remember that if a manager is buying and selling a stock once every year or so it has to bring into question whether they really have a solid grip on what is going on. All investors should understand that predicting what will happen over the course of such a short period is very difficult to do, so why would mutual fund managers consistently take a gamble on what will happen over that period? It makes very little sense.

Not all mutual funds have high turnover ratios, and not all of the mutual funds with extremely low turnover ratios are the best funds out there, but you should definitely be wary of a fund with high annual turnover ratios. Avoid high turnover mutual funds since you will end up paying a lot more out of pocket and you likely won’t achieve great investment returns over the long run either.

As an investor you should know that not all mutual fund families are created equal. Some mutual fund families are much more prone to loading their funds with extremely high fees and expenses, while others do their best to keep the fees and expenses low. The average performance of the mutual fund is also very important, so having taken these things all into account let’s take a look at the best mutual fund families.

Top Four Mutual Fund Families

1. Vanguard- Vanguard belongs in the top spot because of the way they have pioneered the mutual fund industry. They have set the bar for low cost mutual funds and have forced other mutual fund companies to lower their expenses to compete with them. A wide variety in funds available and some impressive returns certainly don’t hurt their cause either.
2. T Rowe Price- T Rowe Price has done a great job of bringing new and unique funds to the market such as retirement mutual funds that have specific target dates. The Maryland-based company has also done a good job of keeping their expenses lower than most. They have top performing mutual funds in many different categories annually.
3. PIMCO- Hands down PIMCO is the best of the bunch when it comes to offerings for bond related mutual funds. Bill Gross of PIMCO has a reputation as the leader in this industry. The company has consistently performed better than its rivals and its costs are fairly reasonable.
4. Bridgeway- This mutual fund company specializes in small cap mutual funds, and doesn’t handle as much money as the rest of the families on this list. It is tough to deny Bridgeway a spot after looking at the returns from some of their best mutual funds over the last several years. The Bridgeway funds also have a name for being very socially responsible. In fact, Bridgeway donates 50% of its investment advisory fee profits to charity!

While there are certainly top mutual funds from other mutual fund families, these four families are a great place to start your search for a highly ranked low cost mutual fund.

This is a topic I feel very passionately about because I truly believe that many investors are being ripped off by loaded mutual funds. There is absolutely no reason to be allowing a mutual fund company to take advantage of you by charging you a massive load (fee) just to own their fund. What are mutual fund loads? They are fees charged by the mutual fund when you make a transaction inside a particular fund. These fees are generally either right at the time of purchase (front-end loads), or when you sell the shares in the mutual fund (back-end loads).

Top Four Reasons to Avoid Loaded Mutual Funds

1. They drastically drag down your overall return on investment- A fee of around 5% (which is the average mutual fund load), will drag down your overall return on investment in a hurry. Forgetting to include this fee in your overall return on investment is a major mistake.
2. They perform no better than a no-load fund- It’s not as if you are getting a superior product here. The truth is loaded mutual funds perform no better on a year-to-year basis than no-load funds. In fact, some investors find that loaded funds do worse because they are more worried about selling their product to financial advisers than picking great stocks.
3. There are tons of terrific no-load funds- There is no excuse such as saying there aren’t enough n0-load mutual funds to pick from. Indeed there thousands of no-load mutual funds which have a proven track record of outperforming the market.
4. You don’t want to line the pockets of a salesperson- Let’s face it, a loaded fund is simply lining the pockets of a salesperson for this mutual fund. In this transaction what happens is the customer gets screwed and the salesperson gets rich. We don’t need any of that.

Make those loaded mutual funds a thing of the past because they certainly aren’t doing anything to help you.

What is a prospectus? A prospectus is a formal legal document filed with the Securities and Exchange Commission that provides details about an investment offering that is available to the public. The goal of the prospectus is to provide notes and facts that make the investor much more informed.

If the whole point of a prospectus is to inform investors and help them make better investment decisions then why don’t more investors use a prospectus? It’s one of the things that I personally don’t understand, since it seems to make so little sense. The prospectus is there for you, free of charge, to help you make a better informed investment decision and many people decide that they do not wish to use it.

Both stocks and mutual funds are required to provide a prospectus at least once a year. This annual prospectus contains information about what the company or fund has done with their money in the last year and how things have gone, as well as information about expectations for the future. Generally a prospectus is broken up into categories that show past performance and recent achievements, then they provide an outlook for the near and long-term future.

A stock’s prospectus is essential to an investor who owns shares in that particular company or is seriously considering owning shares in that company. Financial information and words directly from the executives should help you in your decision making process. A mutual fund’s prospectus is very helpful for an investor that is simply looking to get inside the mind of a seasoned Wall Street money manager. The mutual fund prospectus is where that particular manager will talk about their outlook for stocks and the economy. The prospectus also has a full list of all the stocks the mutual fund owns, which should be of great interest to the individual investor.

The bottom line is a prospectus is there to help you profit. Use this important investment tool as often as possible!

This is certainly not news that the average investor likes to hear, but several major mutual fund families are beginning to raise fees and expenses in some of their mutual fund names. Notably, Vanguard announced that its US Value Fund will now charge 0.46% versus its previous level of 0.37%. Vanguard has always been the leader in keeping mutual fund fees as low as possible, and though this level is still very reasonable it points out the fact that rising fees and expenses are a major concern right now.

What’s causing the need for mutual fund families to raise mutual fund fees during this economic recession? Quite frankly as mutual funds have more and more money taken out of them by investors during the current economic recession and market volatility the mutual funds have their margins squeezed. The mutual funds are forced to do something to cut their costs and increase their revenues, which usually means either quite a few jobs will be lost or the expense ratios at their funds will go up. In some cases there may be jobs lost as well as ratios rising. Two years ago the fund was probably managing enough money that they could efficiently produce a nice profit, but now they have far less money to handle and things are much tougher.

The fact that mutual fund expenses are likely to go up in the coming months is a bitter pill to swallow for investors who have seen their mutual funds lose a significant amount of their value in the last year or two. In the end it simply is a business decision that some mutual fund families will have to make, because they are trying to run a profitable business. As an investor finding mutual funds with solid low cost ratios will be more important than ever in the coming months.

Have you ever tried to get into high profile mutual fund and found out that the fund is closed for new investors? All such funds are opening up again for new investors because of huge cash outflow from those funds. Oakmark Equity & Income, Sequoia like funds opened the door for new investors to get more money in. If you had eyes on some of these exclusive funds, check out whether those funds accept new investors now. The odds are in your favor!

Source: Wall Street Journal

As an investor in mutual funds you should certainly be considering how much you are paying in expenses. If you have read this blog before you know that no one should be paying for any loaded funds, so we’ll assume you have a no-load mutual fund. The question then becomes, what is a reasonable expense ratio for mutual funds?

There is no single correct answer for a reasonable expense ratio for mutual funds, since funds in different parts of the market tend to have different expense ratios. The best way to gauge how expensive a mutual fund is can often be to compare it to its peers.

The good news is that over the past few years the average mutual fund expense ratio has actually dropped quite a bit. Last year the average expense ratio was just 1.19% as compared to 1.40% in 2003. The bad news is that many mutual funds are now speaking of the need to raise their expense ratios again.

There are a couple reasons for the drop in mutual fund fees in the last few years. The first one is that the overall stock market has suffered a great amount, which generally leads to lower fund expenses. The second is the increase in the amount of index funds, which are far cheaper than other funds that are actively managed.

I suggest investors use Morningstar to look at a particular mutual fund and compare it to all of its peers. There simply is no reason for any one fund to have expense ratios far higher than a similar fund. You do need to understand that funds such as international funds, emerging market funds, and small cap funds tend to have higher expense ratios. The lower expense ratios are typically found in index funds, large cap value funds, and passively managed funds.

Comparing mutual fund expenses is a great idea, just make sure you are comparing apples to apples and not apples to oranges!

Investing in mutual funds is a very popular thing to do for many investors. Mutual funds make a lot of sense for a large section of the population since they allow you to quickly pool your money with other people’s money and receive professional management and great diversification of your investments. Before you invest in a mutual fund, you should always do your own research as to which fund is worthy of your investment. I have compiled a list of five sites that are great to use for mutual fund research purposes.

Top Five Mutual Fund Research Sites On the Net

1. Morningstar.com – For quite some time now Morningstar has been considered the gold standard in mutual fund research, and for good reason. Morningstar has dozens of analysts in all of the mutual fund fields that are specifically trained to follow every move that the mutual fund managers make and take note of every correct and incorrect step they take. Compare mutual funds in the click of a mouse at this site with no problems. Morningstar mutual fund ratings are also available for free to the public. The broadest offering of mutual fund research is here.
2. Yahoo Finance – The Finance site at Yahoo has always been one of their stalwarts and the mutual fund page is definitely very useful. The mutual fund screener is dynamic, and completely free to use. Yahoo also has an easy way to track the top 10 holdings of each mutual fund in daily trading.
3. WSJ.com – Wall Street Journal Online is often overlooked for mutual fund research, but I find the site to be very useful. The site is great at ranking which funds perform well vs. their peers over the short and long run, and the mutual fund charts here are above average.
4. Kiplinger.com – Kiplinger Magazine is much more focused toward investments such as mutual funds versus individual stocks, and the website also has some great information. Kiplinger has a list of its favorite mutual funds, which it calls the Kiplinger 25, which have outperformed the market nicely in the long run.
5. Fool.com – Motley Fool is a good website to use to understand the basics of mutual funds as well as the catches of some mutual funds. The Fool does a great job of showing investors what to avoid when looking for great mutual funds.