When three Boston money managers pooled their money in 1924, the first mutual fund was born. In the subsequent eight decades, that simple concept has grown into one of the biggest industries in the world, now controlling trillions of dollars in assets and allowing small investors a means to compound their wealth through systematic investments via a dollar cost averaging plan. In fact, the mutual fund industry has spawned its own stars with cult-like followings: Peter Lynch, Bill Gross, Marty Whitman, and the folks at Tweedy, Browne & Company just to name a few.
With so much at stake, what should an investor look for in a mutual fund? This handy ten-step guide can make the process a lot easier and give you some peace of mind as you sift through the thousands of available options. As always, grab a cup of coffee, sit back, and in no time you can feel like a mutual fund pro!
Some mutual funds charge what is known as a sales load. This is a fee, usually around 5% of assets, that is paid to the person who sells you the fund. It can be a great way to make money if you are a wealth manager, but if you are putting together a portfolio, you should only buy no-load mutual funds. Why? It's simple math!
Imagine you have inherited a $100,000 lump sum and want to invest it. You are 25 years old. If you invest in no-load mutual funds, your money will go into the fund and every penny - the full $100,000 - will immediately be working for you. If, however, you buy a load fund with, say, a 5.75% sales load, your account balance will start at $94,250. Assuming an 11% return, by the time you reach retirement, you'll end up with $373,755 less money as a result the capital lost to the sales load. So, repeat after us: Always buy no load mutual funds. Always buy no load mutual funds. (Keep Saving It!)
