by Erik Van Tongerloo

Created on: December 31, 2008   Last Updated: September 25, 2009

Mutual funds are a popular investment instrument but before you want to use this investment instrument you can best make your homework before you decide. Everyone wants to reach a higher return on their savings and investing in mutual funds can be a wise decision for you because the risk is fewer than investing in stocks or bonds. Many people tend to believe mutual funds will always offer higher returns than savings accounts but you can go wrong if your choice doesn't meet your goals.

There is a wide variety of mutual funds and some may have low risk; there are maybe more with a high risk potential. Mutual funds are especially popular because of its diversification. You might spread your risk over 50 companies or more with one mutual fund and tend to believe you will always reach a higher return than a savings account; nobody can assure you are right. Mutual funds are long-term investments and the funds goal needs to match your own goals, otherwise you may take risks which you can't afford.

Here are some necessities you need to know before you buy a mutual fund:

1. Understanding mutual funds

Mutual funds are a basket of different investments and managed by a professional fund manager. This manager buys and sells stocks, bonds or any other type of security according to their investment objectives.

2. The strategy of the mutual funds

If you want to invest in mutual funds you need to know your goals. Selecting the right mutual fund for you requires time and you need to ensure if the goals of the mutual fund meet your own goals. Your risk profile is important to know which types are useful for you. If you are an aggressive investor you can make your choice between the different equity funds.

These funds invest in stocks of different companies and according to a certain strategy. Some may invest in certain sectors, for example energy, finance; others will invest in blue chips, small chips, country related stocks, index funds, continent related stocks, worldwide or a mix of them.

If you want to limit your risk you can make your selection between balanced funds, money market funds, bond funds, fixed income funds. There is no fund which can maximize all goals on the long run.

3. The risk factor

There are always risks when you invest in mutual funds. The higher the proportion of shares in your mutual funds the higher the risk will be. Equity funds have a higher risk than bond funds but the return can also be much higher. Bond funds will never reach returns of 20% or

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