When you set out to choose a mutual fund to invest in, what you’re really trying to do is to balance cost, risk and performance.

To Load or not to Load?

The age-old case for and against the two types of mutual funds – load funds and no-load funds. The difference is that the former charges a sales commission, and that you benefit from a stockbroker’s advice. There may be charges when you buy into the fund (known as a front-end load), and charges when you sell (commonly known as back-end load, redemption fee or deferred sales charge). However, this does not guarantee a higher return. No-load funds are not fail-safe panaceas either; they can carry hidden costs like advertising expenses.

If you’re looking to buy a load fund, be sure to check the experience of the managers. As everyone has to start somewhere, be aware that some companies do allow young blood to manage smaller funds.

Index Funds

While in the market to invest in mutual funds, you’ll also come across index funds, which are a type of mutual fund with a portfolio that tracks the components of a market index such as the Standard & Poor’s 500 Index, which is a committee-selected group of 500 large market value stocks – in essence, it tries to mimic the performance of pegged stock market indices. These funds function on a more passive form of management, hence resulting in lower operating costs.

Some Fundamentals to Lean On

Lay out your investment goals before you take the plunge into mutual funds – if you have time on your side it most likely means you can spare to be more aggressive and choose a higher risk fund.  Mutual funds are not considered high risk as it benefits from the padding of diversification, investing in stocks ranging from a mere ten to hundreds.

In looking at a mutual fund’s track record, don’t make the mistake of sizing it up based on short-term performance. For example, if the mutual fund has had an astounding past three months, it could well just point to Lady Luck, or a combination of short-term factors – one of the companies issued IPOs, for example, or one of the companies was acquired. These doubtlessly boost the stock, but it’s not a long-term upswing. Use figures from at least three years back; going back as far as a decade is not unconceivable. You’ll be looking for consistency in the fund’s returns, not spurts of great runs followed by downswings.

Have a look at the fund’s expense ratio – this ratio is calculated by dividing the annual fees charged by the fund (typically advisor’s fees, legal and accounting fees but excluding commissions, interest on loans or income tax) by average net assets. You want to go for an expense ratio of 1% and below; any figure above 2% is considered exorbitant. High expense ratios point to recurrent poor performance by the fund. One caveat on analyzing via the fund’s expense ratio is when a mutual fund allows investors to enter with a very low minimum sum – this drives up its expense ratio as it is more expensive to deal with a large group of small investors.

The length of time in which a fund holds on to the stocks it buys is also indicative of its strength – the longer the stock is held on to, the less trading is done. This keeps trading fees lower, as each time stocks are bought and sold a fee is incurred, which lowers the capital gains taxes. The turnover rate of a mutual fund should be lower than 80% -- a 100% rate essentially means the fund is buying a completely new set of companies each year.

Finally, remember to reevaluate your portfolio ever three to six months, and it’s commonly accepted that investors should have no more than ten funds in their portfolio at any given time.