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16 Best Tips on Mutual Fund Basics

Fund Selection, Analysis, Diversification, Taxation, Best Practices & More


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It's never too early or too late to review the basics of investing with mutual funds. Check out this easy list to get started or to get back on track toward investing success. Here are the 16 best tips for investing success with mutual funds, from beginning, to selection, to analysis to building a portfolio, to taxation and more...

  1. How to Get Started Investing With Mutual Funds

    Investing begins before buying the first mutual fund (or prior to buying the next one). If you are just getting started, you may want to try beginning with a balanced fund. You will also want to ask questions: What is it that you would like to accomplish with your savings? Do you have specific goals, such as saving for retirement, or do you have some broadly defined goals, such as the accumulation of wealth for the general purpose of strengthening your financial security? What is your time horizon? One year? Five years? 10 years?

  2. Know Your Risk Tolerance

    Before choosing your funds, you need to have a good idea of how much risk you can tolerate. Your risk tolerance is a measure of how much fluctuation (a.k.a. volatility—ups and downs) or market risk you can handle. For example, if you get highly anxious when your $10,000 account value falls by 10% (to $9,000) in a one-year period, your risk tolerance is relatively low—you can’t tolerate high risk investments.

  3. Determine Your Asset Allocation

    Once you determine your level of risk tolerance, you can determine your asset allocation, which is the mix of investment assets—stocks, bonds and cash—that comprises your portfolio. The proper asset allocation will reflect your level of risk tolerance, which can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).

  4. Review the Basic Types and Categories of Mutual Funds

    Mutual funds are organized into categories by asset class (stocks, bonds and cash) and then further categorized by style, objective or strategy. Learning how mutual funds are categorized helps an investor learn how to choose the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories that further describe the investment style of the fund.

  5. Build Your Portfolio of Mutual Funds

    Building a portfolio of mutual funds is similar to building a house: There are many different kinds of strategies, designs, tools and building materials; but each structure shares some basic features. To build the best portfolio of mutual funds you must go beyond the sage advice, "Don’t put all your eggs in one basket:" A structure that can stand the test of time requires a smart design, a strong foundation and a simple combination of mutual funds that work well for your needs.

  6. Learn How to Choose the Best Funds

    Now that you know your asset allocation, you need to begin the selection of your mutual funds. If you have a broad choice of mutual funds you begin by using a fund screener or you may simply compare performance to a benchmark. You’ll also want to consider important qualities of mutual funds, such as fund fees and expenses and manager tenure.

  7. Understand Mutual Fund Fees

    Mutual funds have various fees attached to them. In addition to the Expense Ratio, you'll need to understand costs associated with buying and selling shares of funds, in addition to taxes and more.

  8. Know the Basics on Mutual Fund Taxation

    How does one reduce taxes on mutual funds? Which types of funds are best for taxable accounts? Why did you receive a 1099? Understanding mutual fund taxation will help you improve your overall returns by being a smarter investor. As they saying goes, "Nothing is sure in life but death and taxes." However, taxes can be minimized or even avoided with regard to mutual fund investing. Therefore, with knowledge of the basics on mutual fund taxation, you will be enabled to increase your overall investment portfolio returns.

  9. Use the Best Mutual Fund Research Sites

    Mutual fund research can be made easier with a good online research tool. Whether you are a beginner or a pro and if you are looking to buy the best mutual funds, review an existing fund, compare and screen different funds or you are just trying to learn something new, these mutual fund research sites are among the best.

  10. Learn How to Analyze Mutual Fund Performance

    Past performance of a mutual fund may not be a guarantee of future results but if you know how to analyze performance--if you know what to look for and what to avoid--you can make better investment decisions.

  11. Understand the Basics of Statistical Analysis

    Statistical analysis of mutual funds is just what it sounds like--a means of studying the quantitative aspects of a fund to help the investor gain an understanding of past performance for a clue about future results. Yes, there is no "guarantee" of future results but investing is not about guarantees--it's about taking calculated risk. Fortunately, you don't have to be a math wizard to use statistical analysis in mutual fund research. All of the key quantitative measures have already been calculated. So your only knowledge or skill is to understand how to use these measures to choose the best mutual funds.

  12. Learn How to Diversify With Mutual Funds

    Diversification with mutual funds is more than just putting your eggs into different baskets. Many investors make the mistake of thinking that spreading money among several mutual funds means they have an adequately diversified portfolio. However, different does not mean diverse.

  13. Avoid the Dave Ramsey Mistake

    Dave Ramsey is a good entertainer and seems like a genuinely nice person. However, with regard to mutual funds in specific, his investment philosophies are bordering on dangerous. Mutual fund investors can get some good tips from his talk radio show but they are wise to understand the difference between entertainment and sound investment practices.

  14. Know the No-Load Fund Families (and Why to Use Them)

    Without a doubt, no-load funds are the best choice for mutual fund investors. But what are the best no-load funds and where can they be found? With thousands of mutual funds to choose from and hundreds of different fund families offering them, an investor can suffer from choice overload and possibly make needless mistakes.

  15. Consider Using an S&P 500 Index Fund

    If you guess that the best S&P 500 Index funds are those that have the lowest Expense Ratios, you are mostly correct. However, in addition to low costs, there is a delicate balance of science and art to indexing that makes only a few mutual fund companies able to offer the best index funds.

  16. Consider Adding Sector Funds

    Sector Funds focus on a specific industry, social objective or sector such as health care, real estate or technology. Their investment objective is to provide concentrated exposure to specific industry groups, called sectors.

  17. Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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