Mutual Fund Investing

THE BASICS OF MUTUAL FUND INVESTING
A mutual fund is simply a fund that pools together investments from many investors, and collectively invests the money, most often in stocks and bonds. Mutual funds are managed by a professional manager, and how well the fund performs relies almost entirely on who is managing the money. The most famous mutual fund manager of all time is probably Peter Lynch of Fidelity, who once managed a mutual fund that consistently returned over 20% per year.

The advantage of mutual fund investing is that it is largely a hands-off investment, and the investor does not have to actively watch the markets. It also allows for instant diversification, since your money is spread out over the hundreds of securities owned by the fund.

The disadvantages of mutual fund investing are that there is a 1-2% fee on most mutual funds, and history has shown that the majority of mutual funds do not beat the market averages. So in most cases, you may be better off investing in an index fund or exchange traded fund such as the SPY, which is based on the benchmark S&P 500. If you select the right fund, however, your returns can beat the averages and you could do quite well with mutual fund investing.

HOW TO SELECT A FUND
A mutual fund is only as good as its manager. So you want to choose a fund that is run by a manager who has been around for a while and has a proven track record. If you are considering mutual fund investing, you should get the annual returns of the fund you are considering for the last ten years and analyze them closely.

• Make sure the fund has a decent average return that is above the annual returns of the S&P 500. If it doesn't, there is really no point in selecting that fund over an index fund or exchange traded fund (ETF). You can find the returns of various mutual funds using Yahoo Mutual Funds Center.
• Check the fund's past performance during difficult years such as 2000 and 2001.
• See if the returns are volatile or smooth. Even if the overall returns are decent, if the fund goes up 30% one year and goes down 27% the next, it may be too volatile to be a reasonable investment.
• Read up on the background of the fund manager. Be wary of funds that have changed managers. If your manager leaves a good fund, then don't assume the fund will keep performing like it used to.
• Use at least one service like Morning Star, which provides helpful information about mutual fund investing, and rates mutual funds. You can view the Morning Star rating of a fund at Yahoo Mutual Funds Center. (5 stars is the best)

ALTERNATIVES TO MUTUAL FUND INVESTING
Since most mutual funds do not outperform the market averages, a lot of people simply choose to put their money into an index fund, which is a fund that is designed to track the returns of a stock market index such as the S&P 500. Many companies offer index funds, but the most famous one is probably Vanguard's S&P 500 Index Fund. You can also invest in something called exchange traded funds (ETFs), which are designed to mirror the returns of various market averages. The ETF for the S&P 500 has the ticker "SPY" and can be bought just like an ordinary stock. There are numerous ETFs to choose from, and many are sector-specific.