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How To Pick A Mutual Fund

As a newbie investor, it is important to know how to pick a mutual fund but from personal experience, the sheer volume of funds can be overwhelming.

The first way to narrow down from thousands of mutual funds is to first filter for funds in line with your personal investment strategy/goals. For example, if I want the lowest-cost low-risk investment options, then I might want bond index funds. That single step filters out thousands of other funds that are not in line with my strategy/goals.

With that in mind, here’s are five things that I think about /look at for each fund. These will show you how to pick a mutual fund. I consider these five factors COLLECTIVELY:⁠

Screenshot of a Fidelity Index Fund Objective. How to pick a mutual fund. One of the first things to do is to review a funds' objective.
Screenshot of a Fidelity Index Fund Objective

1. Fund Objective

Every fund has an investment objective—a goal or financial result it wants to attain for its investors. Every fund manager has his/her own investment approach they follow in making investments to achieve the fund’s objective.

Most fund objectives are value growth (i.e. capital appreciation), income, or a combination of growth and income. For example, a growth fund selects investments that seem likely to increase in value over time. An income fund targets investments that it expects to generate revenue, through the payment of dividends.

When picking a mutual fund, consider reviewing the fund manager's experience to find out what the manager has done in the past and their track record.
Screenshot of Fund Manager’s Background/Experience

2. Fund Manager’s Experience

The name of the fund manager(s), their total number of years of experience at the fund, average years of experience, and how they’ve done at the fund or previous funds that they have managed.

When picking a mutual fund, review the expense ratio or cost of investing in the fund. These costs compound and add up over time!
Screenshot of details around the Expenses, Minimum, Gains, and Dividend History of a Fidelity Mutual Fund

3. Cost/Expense Ratio⁠

The expense ratio of a fund is an annual fee (as a percentage of your total holdings) that goes towards running the fund.  While expense ratios may seem minimal, they certainly add up over time (hello compounding!) and can drag down your returns. Not going to lie, this is very important to me. Index funds cost much less to own than other mutual funds. Therefore, an investor looking for decent returns at a low cost can sort through their list of options by filtering for only index funds and ETFs.

When picking a mutual fund, review the fund performance, ratings over the past year, 3 years, 5 years, and 10 years.
Fidelity Total Market Index Fund Performance and Ratings Summary

4. Fund Performance

This one can be tricky, while historical performance does not guarantee future results, I still like to see it! ⁠I look at Morningstar ratings or other long-term performance benchmarks to help me eliminate long-term poor performers in my search. It can also help me eliminate funds with large swings in performance if I’m not open to that level of risk. If It doesn’t have a Morningstar rating of 4 or higher, I keep it moving.

In figuring out how to pick a mutual fund, another factor to look at is the funds asset under management. This is a screenshot of this information for a fidelity index fund.
Fidelity Total Market Index Fund Net Assets

5. Total AUM (Assets Under Management)⁠

⁠It is the total amount a mutual fund is managing. Generally, investors often consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience. Further, the longer a fund has been around, the higher its AUM is likely to be.

Where Can I Find This Information on How To Pick A Mutual Fund?

  1. Morningstar
  2. Your brokerage (the main brokerages like Fidelity, Schwab, Vanguard have great research tools).

Hope this has been helpful in providing guidance on how to pick a mutual fund. What else do you consider when evaluating mutual funds?⁠ What other questions do you have about investing?

Disclaimer: This is not investment advice, this is for informational and educational purposes only

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