3 Questions to Ask Before Investing in an Equity Mutual Fund

By Chris Blanchet


Equity mutual funds offer a great opportunity for new, small or uncertain investors to take advantage of the potential growth facing the market in the coming years. Some of the benefits to equity mutual funds are that they are professionally managed and normally limit investor exposure through proper diversification.
When it comes to Equity mutual funds, investors really need to understand three basic facts about the fund before they invest in it. By understanding these basics, investors will feel better about investing their money because they will know what the mutual fund is all about.
1. What is the fund's track record compared to its peers? Obviously the past two years have not been terrific in terms of mutual fund returns (although 2009 alone has indeed been positive). However, a poor 2- or 3-year rate of return should not take away from how well the fund has performed against similar funds or the index itself. If the index has returned -9.5% over a three-year period and the fund you are considering returned -7.5%, you would assume this to be safer than the index itself. However, you want to take this investigation one step farther and see how well the fund held up against its peers. If it is better, then your fund should be considered a better-performing fund. Another way to gauge this is to look at Morningstar ratings. The higher the rating, the better the risk-adjusted rate of return.
2. What is the fund's management team? By getting to know the management team, you will get to know how experienced the team is in term of managing funds and managing funds properly. In most cases, funds with high management turnover will likely perform worse than funds with solid investment teams. In addition to the team, try to understand the team's management style. Are they aggressive managers who turn-over their holdings frequently or do they take a buy-and-hold approach to allow for longer-term growth and returns? Are they investing in small, higher-risk companies or larger blue-chip companies? Understanding the underlying management of the fund will allow you to get comfortable with the fund before you pour your money into it.
3. How many assets does this fund have under management? If a fund has little money under management, it could be a sign of two things. One is that the fund is new, the other is that the fund is not popular. If there are few assets under management, you could have difficulty accessing your money when you need it. Invest in larger funds if you are relatively new or know you will need your money within a short period of time.
By answering these three questions, you will get a better appreciation for the fund you are about to invest in. This is important because the more comfortable you are, the less involved you will need to be in monitoring your investments, allowing you to enjoy longer-term growth without compromising your sanity.
Chris has more than 16 years of experience in the financial services industry. He currently manages a debt-related website that helps people with tips on how to Repay Debt at HowToRepayDebt.com. As well, he manages a website about powerful and inexpensive storage devices like the Memory Card 1GB at MemoryCard1GB.com.

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