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Esther.Dumbiri

Mistakes to Avoid When Choosing Mutual Funds to Invest in

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Mutual funds are a good way for investors to build wealth but they aren’t completely risk free. With a mutual fund you get exposure to different industries without having to become an individual stock picker.

But when it comes to mutual funds, not all of them end up being profitable. Choose the wrong one and you may face investment areas that erode your investment returns.

With that mind, here are some mistakes to avoid when choosing a mutual fund for an investment.

 

1. Paying Too Much in Fees

When it comes to mutual funds, investors are going to pay different fees depending on the fund they go with. Investors who don’t pay attention to fees could see their returns diminished as a result, even with a mutual fund.

Some mutual funds pay brokers a commission for selling their product to investors. That commission, known as a front-end load can be up to 5% of invested assets and is usually charged upfront.

A back-end load mutual fund is a fee you pay when you sell the fund. The longer you hold on to it the smaller the fee.

A no-load fund has no commission associated with buying or selling the fund, and is often a good choice for mutual fund investors who want to minimize the fees they have to pay.

 

2. Chasing Past Performance

For most people mutual funds could be a good way to build wealth but often investors will chase past performance in hopes of seeing the same returns.

Far too often, investors will choose their mutual funds based on past performance without giving much thought to what the fund invests in and whether or not the exposure matches their risk tolerance and time horizon for investing.

Sadly, past performance doesn’t mean future performance, and the fact that a fund did well one year or even over five years doesn’t mean it will continue to do so.

While past performance can help narrow the playing field it shouldn’t be the only reason to choose a particular mutual fund.

 

3. Not Paying Attention to the Tax Implications

Many investors will use take funds from their already taxed salaries and invest in mutual funds outside of non-retirement accounts, which could create a tax event if they are not careful.

These tax events occur because if an investor chooses an actively managed mutual fund that has a high turnover rate, the investor could be on the hook for any gains.

Typically, the mutual funds with higher turnover rates are going to generate more tax events of which investors have to be aware. Unfortunately, most mutual fund marketers would not tell you about this!

 

4. Holding the same investment via different mutual funds

Many people think they can choose a mutual fund, invest in it and then forget about it without giving too much thought to the underlying investments in the fund. If you own only one mutual fund this may be acceptable, but if you have your investments spread out over different funds to get diversification then you are going to have to do some homework.

You don’t want to hold the same investments in multiple mutual funds. The whole idea is to be diversified in different asset classes and industries, and if your mutual funds all hold the same stocks and/or bonds, then you aren’t diversified.

A possible outcome is that if the market goes down, you are going to be positioned for a bigger blow without having your investments spread out.

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Mutual Funds are also quite risky to invest in. You need to choose those funds which have a great team behind and which allows you better opportunities for the returns. Many people lose their money due to their wrong choice. You have to research well in this regard!

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I believe that investing in mutual funds is one of the top things you can do. The biggest problem i have seen people with mutual funds is the taxing issues. They don't have high knowledge about the taxes and i don't blame them. It is a very complicated issue to comprehend.

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