6 of 14

Write now Article Tools

Investors have literally thousands of choices when it comes to selecting a mutual fund. Before selecting to invest in any given fund, however, you should determine your investment strategy and your level of acceptable risk. In this first step, you may decide to consult a financial advisor. Whether you get help with your decision making or decide to go it alone, once you have (1) established what you are saving for, (2) determined when you will need the money, and (3) decided how much risk you can tolerate, narrowing the choices of mutual funds will become much easier.

Mutual Fund Types
Most mutual funds fall into one of three different categories:

* Money Market Funds
The risk associated with this type of fund is relatively low. By law, these funds can only invest in short-term, high quality investments issued by the US government, by US companies, or state and local governments. Although the risk with this type of fund is lower, no fund is "safe." There is always the risk that inflation will outpace these mutual funds, and returns may be eroded over a period of time.

* Bond Funds (also called "Fixed Income Funds")
These funds can vary widely in risk, and are subject to the following three factors: (1) credit risk, (2) interest rate risk, and (3) pre-payment risk.

* Stock Funds (also called "Equity Funds")
The overall risk with this type of mutual fund is the highest of the three types listed. The potential danger lies with the wide fluctuation of stock prices for a broad range of factors, including the overall strength or weakness of the economy and demand (or lack thereof) for particular products and services.

Degrees of Risk
All mutual funds carry some risk. Investors may lose some or all of the money they invest (the principal) as a result of the fluctuations in securities held by the fund groups, which go both up and down. Dividend and interest payments may also fluctuate with market conditions.

Before investing, you should read any mutual funds' prospectus and shareholder reports carefully to see just what investment strategy the fund is pursuing and determine the attendant risk. Funds with higher potential rewards may also take risks that are beyond what you are comfortable with or be inconsistent with your financial goals. No matter how good the promises look, these are not good funds for you.

In addition to determining your long-term strategies and level of risk tolerance, there are also fees and taxes that are important to consider. These additional deductions

• 1
• 2
• 3
• next page >>

Add your voice

Know something about What you need to know before you buy mutual funds?
We want to hear your view. Write now!