If you are thinking about investing some money in mutual funds, it’s important to understand some basic fund facts first. Learning about the various types of funds that you will come across in your search for the right ones for you. There are those that pay varying degrees of commission, low expense or high expense funds, those that carry transaction fees and those that don’t, among other differences. It will be very beneficial to take the time to understand these differences before you invest. Otherwise, you could end up making some very costly rookie errors.
Below are some of the most important fund facts to consider before you invest.
By and large, if you get investment advice from an expert, they will earn a commission for their services. It’s important to understand how the commission structure works and how you will pay for your investment advice – if at all. There is no commission or sales charges associated with no-load funds, but if you invest in A-class shares you’ll pay an average of about 8 percent commission at the outset. B-class and C-class funds will cost you more annually.
Based on the type of commission type you select, you may also have to pay an additional transaction fee each time you pay or sell investments. This fee can range greatly, but it generally falls between the parameters of $15 and $75 per trade. If you make your purchases by way of some of the bigger mutual fund marketplaces, however, your transactions may not come with any transaction fees at all. Most funds also have redemption fees as well, meaning that each time you redeem your fund you’ll have to pay a fee. Redemption fees are used to discourage those who have their eye on day trading their mutual funds.
Annual expense charges
Always be sure you are aware of the annual expense fees charged by your fund. Sometimes, these fees can dramatically (negatively) impact the amount of return you’ll see on your investment. Always weigh the fund’s annual expense fees against its long-term returns. If the expenses outweigh the returns on average, steer clear of that fund. It won’t make you much money, if any. No-load funds generally feature low annual expense fees.
Experienced fund management
Always look for experienced fund management for your funds. If your fund’s management has changed frequently over the course of recent years, this is probably a red flag signalling you to stay away from this fund. On the other hand, if your fund has had the same management for several years (generally about 10) that’s a good indication that they are competent and know what they are doing. That’s the place you want to invest your money.
Risk vs. return
Before you invest, it’s important to weigh the risk vs. the return. In some cases, the same fund will feature a no-load class and also commissioned classes. When that’s the case. The no-load class will usually wins over the commissioned classes, both in terms of lower risk and increased returns.