Selecting a Mutual Fund: Factors to Consider

QUESTION: One of my resolutions for the new year is to begin investing in a mutual fund or two that would fund my retirement in 20 to 30 years. What factors should I consider in selecting a mutual fund that is right for me?

ANSWER: Congratulations on deciding to take some action today that could lead to a big payoff in the future.

While your question is fairly simple, the answer can be quite complex. In fact, entire books have been written addressing the subject.

But in the interest of brevity, here are some factors that you should consider:

• Investment objective. Because you already know that you want to use mutual funds to build a retirement nest egg, you've already settled this one. Others may want to invest in funds to send their children to college or to buy their first home.
• Time frame. Because you don't expect to need the money for 20 to 30 years, you can be more aggressive with your mutual funds than someone who will need the money in five years to buy a car.

  The reason that you can be more growth-oriented is that you have time on your side. You will be able to withstand the market's short-term movements and invest for long-term results.

  On the flip side, if you were investing in a fund in order to buy a car in a year or two, you'd be wise to be more conservative and concentrate on funds that put a high priority on preservation of capital.

   

• Risk. Everyone has a different tolerance for risk, particularly when it comes to the stock market.

  That's why some investors bet a bundle on Google while others put their bankroll on General Electric. It's the same with mutual funds.

  I've seen investors put their entire 401(k) into a few aggressive growth funds, and I've seen some put it all into a money market fund.

  The key to me is to invest in a fund that makes you comfortable. You want to be able to sleep at night without anxiety about day-to-day movements.

  In fact, you shouldn't be looking at a fund's performance every day since you're in it for the long term. If you are and it's causing you anxiety, you're in the wrong fund.

   

• Err on the side of caution. If you're looking at a growth fund for your first investment, you might want to consider a slightly more conservative growth and income fund. That way, if the market sours a bit, you will not lose as much, and it's less likely to lead you to give up on investing altogether.

Want to learn more? Check out "Find the Right Mutual Funds" from Morningstar (John Wiley & Sons, 2004), "Mutual Funds for Dummies" by Eric Tyson (John Wiley & Sons, 2004), or "How Mutual Funds Work"  by Albert J. Fredman and Russ Wiles (Prentice Hall Press, 1997).

Source: The Sacramento Bee. © 2005, The Sacramento Bee, Calif. Distributed by Knight Ridder/Tribune Business News. Powered by YellowBrix.