Investment Basics: Mutual Funds - The Selection Process

Investment Basics: Mutual Funds - The Selection Process

November 27, 2017

Colin OSheaBy Colin OShea
Securities Analyst  

You probably put a lot of thought into the decisions you make. Whether it’s where to live or which car to buy, weighing the costs and advantages and disadvantages of your options can help you make an informed choice. Choosing mutual funds* for your portfolio is another important decision that requires your careful consideration. Your Security National Bank Wealth Management financial professional can help guide you in your mutual fund selection process.

First Step: Understand Mutual Funds

A mutual fund is an investment that pools money from a number of investors to buy a portfolio of securities, such as stocks, bonds, and money market instruments. Investors own shares in the fund and receive a portion of the fund’s income. Fund shares may be sold directly to investors or sold through a broker. 

A fund’s net asset value reflects the current market value of the fund’s portfolio minus its liabilities. The fund’s share price is its net asset value per share plus any fees the fund charges. As a shareholder, you potentially can earn money through dividend payments, capital gains distributions, and an increase in the value of your shares. (You would benefit from a price increase only when you sell your shares.) You generally can reinvest gains and distributions back in the fund by buying additional shares.

Next Step: Identify Investment Needs

You should choose mutual funds that are compatible with your investing goals, risk tolerance, and investment time frame. If you are investing for short-term goals, you may decide to choose a fund with a conservative investment strategy. If your goals are long term, you may want to select funds with the best potential for long-term growth. A fund’s investment strategy is stated in its prospectus. 

Time To Evaluate Your Options

Funds may hold investments from just one asset class or from two or more asset classes. Stock funds tend to be more volatile, yet they typically provide the greatest potential for long-term growth. Bond funds** are generally considered less risky than stock funds. Funds may invest in bonds with a variety of maturities and interest rates. Money market funds*** invest in certain high-quality, short-term investments issued by the U.S. government, state and local governments, and corporations. While money market funds have lower risk of investment loss than stock or bond funds, their typically lower returns may not keep pace with inflation. 

Before you choose a mutual fund, check its performance record by comparing it to a benchmark index that holds similar investments. But understand that past performance does not guarantee future results.

* You should consider a fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

** Prices of fixed income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.

*** An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

About the Author

Colin O'Shea

Colin has been with Security National Bank since 2015