Factors To Consider When Buying A Mutual Fund

When shopping around for a mutual fund, there are a variety of considerations to take into account that can affect the fund's performance. Hera are a few:

1.Expenses. Yes, I'll mention it again. Make sure you buy a no load, low fee mutual fund. Any money you pay in fees is less money you'll make in returns.

2.Tax Efficiency. Some funds trade more than others. When a mutual fund frequently sells its positions in favor of buying others, it creates capital gains taxes, which are passed on to you.

There are two types of capital gains, long term and short term. Long term capital gains (positions held over a year) are taxed at 15% (as of this article's writing), whereas short term capital gains (positions held less than a year) are taxed at whatever your federal income bracket is. If you make a lot of money and are in a higher tax bracket, it is in your interest to invest in funds that tend to hold their positions for more than a year, so you do not incur much in the way of short term capital gains taxes.

Please note: if you hold your mutual funds in an IRA or other tax deferred account, then tax efficiency is not an issue. Also, if you have both an IRA and a regular account, put your more tax efficient holdings in your regular account and your less tax efficient mutual funds in your IRA.

2. Asset allocation. If you want 25% exposure to international stocks, invest 25% of your money into international mutual funds. It's good to spread your risk among a variety of stocks, but keep in mind that pretty much any mutual fund will give you diversification into the asset base that it invests in.

4. Management. Obviously, the intelligence and market prowess of the person behind the mutual fund will greatly affects its performance. It is difficult to know how great the fund manager is. Sometimes, subscribing to Mutual Fund newsletters will help in this department, such as the Motley Fool's Champions Fund newsletter, but often times these newsletters are not that helpful. Also, unless you intend on investing $20,000 or more, the cost of the newsletter itself might not make up for the difference in the performance of the mutual fund versus its competitor.

5. Fund size. Smaller funds are more nimble and are generally preferable. A larger fund has more difficulty taking a large position in a small stock. For example, if a $20 billion fund really loves a $300 million stock, it can only invest about 1/10,000 of its fund base in the stock, whereas a $500 million fund can easily invest 1/100 of its funds in the stock.