Fund Selection Process

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Step 1: Save up

Step 2: Be willing to give up your money for at LEAST 5 years. Do not touch that puppy.

Step 3: Profit                     

Okay, I missed a few steps in between. But if you can get past those first two hurdles – the saving and then the disappearance of that hard-earned money for five years, you’re more than halfway there. Next is the “how” and “why” of choosing which fund is right for you, and there’s a pretty easy formula to follow when it comes to tying up that money so that you can earn the best amount on your investment.

The How’s and Why’s Part 1: Determining Risk, Facilitating Reward

Just like a high-stake poker game versus your online version with fake Bitcoins, the more you’re willing to bet, the higher the pot you’ll stand to gain…but if you fold, you’re looking at a larger loss.

If seeing your portfolio (those things that your mutual funds are kept in) swing up and down with the sway of the market causes you to reach for the Xanax, maybe you’re not quite ready for the risk of a volatile mutual fund. Conversely, if you’ve got the money and time saved up and are looking for a larger reward, a conservative investment might not be right for you. Determining where you fall on the spectrum will point you toward a type of mutual fund that’s the best to fit your needs.

Reward expectations further narrow down your mutual fund suitors by ensuring that what you’re giving is getting what you want in return. Of course, the downside of a mutual fund investment is that it’s never guaranteed. But more often than not, you’ll be receiving your payout in the form you decide on today. For some, that means income supplements needed on a monthly or bi-weekly basis. Quick turnaround on investments can lead there. Maybe you’re saving for retirement (also in a 401(k)) and have more time to slowly stock up the cash in a fund that won’t be touched for quite a while. Again, this is a spectrum, and finding the right spot for you – not too aggressive, or perhaps a tad more conservative – is a crucial step in your fund selection process.

How’s and Why’s Part 2: What Kind of Manager Do You Best Work With?

It sounds like a job interview question, but the standards apply to your fund selection process too. Stepping out into the world of mutual funds and meeting a few people isn’t a terrible idea. You’ll want to find out if you like a manager who is more accessible, one who manages a larger fund or smaller one, whether their past performance is better than your previous manager’s, and if it’s been ranked nationally by syndicated publications like Morningstar (think of Morningstar like Glassdoor but for your money holdings) (Buena Vista Inv.). If the shoe doesn’t fit, move on to the next one. There are plenty to choose from, and your narrowed down options from Part 1 will give you a more specific idea of where to start in the overall process.

It’s also important to remember that your investments are supplying your fund manager with his or her livelihood. The fees incurred will vary between each fund, so look at them closely to make sure you’re getting the most investment bang for your buck. Ask about the Management Expense Ratio (MER) first and foremost, because that’s the number that will tell you exactly how large a percentage of your fund will be going to the manager’s wallet. A typical fee (in front-end or back-end load form) usually varies between 3 to 6 percent of the total amount invested or distributed. Sometimes funds won’t charge a fee at all (no-load funds) but will charge an administration fee or an expense ratio for a variety of services paid out of your pocket to maintain the fund offices or employees.

Lastly, there are 12b-1 fees, which can, according to Investopedia, take as much as .75% of a fund’s average assets per year. Which means that three quarters of a percent of your mutual fund investment can be going straight into the pocket of your advisor. To make sure this doesn’t happen, ask your advisor whether your fund has a 12b-1 fee tacked onto the share price so you know exactly what you’re getting into.

If you don’t find the right fit the first time around, return to steps 1 and 2 until you find someone who can and will help you fit your needs. With so many options out there, it won’t take long for you to find your financial soul mate, and then you can finally get to step three: profit