by Jo Ann Brown

Created on: July 27, 2008

People purchase mutual funds for long term growth. The selling price determines how much money will be made on any investment. Buying a mutual fund at its highest price is not good money management. People need to know they are buying a mutual fund at a low price before they finalize the buy order.

There are 5 things you need to know before buying a mutual fund. Using these simple techniques, you will identify a good mutual fund to purchase. Take time to study the information and compare it to other mutual funds in the same class before you decide to buy. The information needed is readily available on any online website such as yahoo. Gathering the following information upfront, will help you avoid costly mistakes.

1. Determine the spread. This is a comparison of the highest price and the lowest price the mutual fund has sold for during the past year. This will let you know if the current price is at an all time low or high for the year. Examining the current price you will immediately know whether money can be made by purchasing this mutual fund. If the current price is $10 and the highest price is $20, the spread is $10 (the difference between the high and low price). People want to buy low so they can profit from the spread. All shares purchased at the low price of $10 will make money when the market rises. If you happened to borrow money against your 401k plan, this is a good time to make a lump sum payoff payment.
2. Determine the top companies the mutual fund is investing in. People want to diversify their investments. Do not buy mutual funds that are investing in the same types of companies, you will not achieve your diversification goal.
3. Determine the expense ratio. The expense ratio shows you how much the mutual fund managers charge you annually for their services. Companies charge differently. Some companies may hide their overhead in a 12-b fee. Make sure the expense ratio is under 1 percent and there are no 12-b fees if at all possible. This will mean that more of your money will be working for you since you are paying a smaller expense fee.
4. Determine if distributions have been paid. Look online and determine if the mutual fund company has ever paid capital gains. Mutual funds investing in the same companies will pay different amounts. When comparing two real estate mutual funds, this factor will weigh heavily on your decision. You will discover that one mutual fund pays a $3 dollar capital gains and the other pays more. Sometimes this difference can be double.
5. Determine the distribution frequency. All capital gains are typically paid annually. Dividends however can be paid annually, semiannually, or quarterly.

Dividends and capital gains payments represent free money. People have the option of reinvesting or receiving these distributions. Reinvesting these distributions means you will acquire additional stocks that you don't have to spend money for. Mutual funds paying quarterly dividends allow your portfolio to grow four times per year instead of one.

These guidelines will increase your investing comfort level. You will know that you purchased a mutual fund at a good price. You will know you can buy more if the price falls again. You will know that you can stop buying when the price reaches it yearly high.

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