You're an experienced investor and already realize what a powerful investment vehicle mutual funds can be. You find comfort in the fact that mutual funds are
professionally managed and your investments are diversified. In fact you may already have an Index Fund or two in your portfolio…but you have some extra money and want to invest in something different – maybe a
fund in a hot sector like technology or telecommunications. Picking an index fund was a "no brainer", but how do you find the best mutual fund for you? Even in specialized sectors, there is a buffet table of
funds to choose from. You'll need to learn how to pick through the fat to get to the meat. Here's how to do it.I may be speaking to the choir, but before you start looking at annual rates of return and
manager track records, you need to determine your investment objective, investment time frame and risk tolerance. Are you willing to risk some of your capital for the potential of a very high annual rate of
return? If you have money invested in a highly volatile mutual fund, can you sleep soundly at night? Are you looking for a good steady return over the next 20, 30, 40 years or will you need the money within
the next five years? Developing a clear cut investment plan is crucial to the selection process. Remember, be brutally honest with yourself so you can sleep better at night. To match your desired rate of
return and risk tolerance, there are several different fund types varying from very aggressive like small cap funds to very conservative like money-market funds. From this list, you can find a fund to best meet
your investment needs. Aggressive Growth Funds These funds generally consist of
small cap companies, emerging industries and volatile securities. The fund managers may also use speculative techniques, such as short selling, to generate higher returns and may stay fully invested most of the
time. Of course, along with higher returns comes higher risk. Aggressive growth funds are better suited for individuals with long-term investment horizons and must be closely monitored for any potentially
adverse changes like new fund managers and a pattern of losing quarters. Specialized or Sector Funds Specialized funds focus their investments in one or possibly two industries or sectors: such as technology,
financial, biotechnology and utilities. Although certainly more diversified than buying a couple of related stocks, you lose some of the benefits of diversification found in other funds. However, if you
happen to pick a hot sector, your returns will surely be higher, but the wrong sector could be deadly to your investment portfolio. Specialized funds can be a safer alternative than trying to pick the best stock
in a hot sector, especially if your prediction goes awry. Growth Funds Although less
aggressive than its big brother, the Aggressive Growth funds, these funds also strive for high returns through capital appreciation rather than dividend income. Growth funds have a mixture of small, mid and large
cap stocks sprinkled with some more conservative securities like preferred stock and bonds. Growth funds will typically yield you higher returns over the long-term and are a good addition to most long term
investment portfolios. |