How to Select a Mutual Fund

Unfortunately, there's no one size fits all strategy when it comes to any type of investing. You need to take into consideration what your needs are and what your future financial goals are. Everyone's situation is unique. We encourage you to talk with your financial advisor to find out which mutual funds would best complement your portfolio. When choosing a mutual fund you should first get a prospectus then, call the fund company. In many cases, the prospectus is available right on the company's website. Also, Morningstar rates mutual funds. Each year end, many financial publications list the year's best performing mutual funds. Naturally, very eager investors will rush out to purchase shares of last year's top performers. That's a big mistake. Remember, changing market conditions make it rare that last year's top performer repeats that ranking for the current year. Mutual fund investors would be well advised to consider the fund prospectus, the fund manager, and the current market conditions. Never
rely on last year's top performers.

The Prospectus
A prospectus for a mutual fund is a publication that has all the information that is required by the Securities Exchange Commission (SEC). The funds propectus includes objectives and policies, roles, services, fees, and major features of the fund.

The prospectus also defines the boundaries within which the fund manager can operate. Using a hypothetical example, we will assume that the prospectus of the Chicken Farms Mutual Fund says "the fund will only invest in chicken farms in the USA that have shown a profit for at least the last two years." The fund manager would have the freedom to buy stock in any chicken farm meeting that criteria. However, the fund could not buy any chicken farm shares anywhere else other than the U.S. The prospectus also tells you the costs of the fund.

Costs of Mutual Funds
Usually, mutual funds are offered with several classes of shares, or they are no-load funds. Mutual fund companies exist to make money. That money can come from many different sources:

• A sales charge: incurred upon purchase of shares
  
• A deferred sales charge: incurred upon the sale of shares
  
• Management fees: an on going operating cost
  
• Distribution fees: on-going costs usually associated with advertising
  
• Trading costs: costs charged by the broker for executing trades within the fund. These can be high in funds that have high turnover rates.
  
• Other expenses: another category for on going expenses
  
• No load funds will typically have no sales charge and no deferred sales charge, but will have the other fees listed.
  

Load funds will offer different classes of shares such as A, B, or C shares. These will be defined by varied cost structures. An example of the impact of an investment which is held for different time periods will also be included in the prospectus. The best deal for you primarily depends on how long you hold the shares. No-load funds that are held for many years can be more expensive than load funds.

In conclusion, mutual funds are a way for investors to diversify their risk and still benefit from
professional money management. The prospectus identifies key information about the mutual fund including its operating boundaries and its costs. The fund manager operates within those boundaries and is important in order to achieve good results within those boundaries. Do your research, then talk to a professional investment advisor about mutual fund investing.