by Tim Parker on May 23, 2009

Think back to when you landed your new job. Did you get any benefits along with that job? Medical and dental coverage are common but many new employees also receive some kind of provision for retirement; your benefits may include a 401K or 403(b) where you have to pick between a whole host of mutual funds.

A First Look At Stock Mutual Funds

I was in my early 20’s when I received a particular envelope through the mail (care of my employer). It was a thick envelope from some investment firm called Fidelity Investments. Did I mention that it was thick and heavy? I had no idea what it was. I opened it to find pamphlet after pamphlet with big words I didn’t understand: growth funds, international funds, balanced funds, etc. And apparently, an early 20 something education major fresh out of college was expected to know what a prospectus was.

Now that I’m a 30 something with a fair amount of financial knowledge, I still don’t spend a lot of time reading the thick, heavy envelope that I get from my retirement fund company.

Since many of us will have to pick stock mutual funds sometime in our lifetime, let’s take a look at how we can make an educated choice even if we don’t like to read through every prospectus.

How To Pick Mutual Funds: Building Your First Investment Portfolio

1. Figure out your goals. First, ask yourself: what are your goals? If you are just out of college and starting your career, you can afford to take some risks. Choose at least one aggressive fund for your retirement portfolio.

2. Do the research. Next, take in as much information as you can about the investments you are considering. At the very least, browse the prospectus and read about the fund: what its goals are, what it invests in, what its fees are and what the fund managers management philosophy is. I also give some attention to the funds track record even though past performance may not spell what happens in the future. A good rule of thumb to follow? See if you can easily explain your investment picks to a friend or a family member. Does your mutual fund invest in emerging markets? Is it a bond fund? Can you describe a bond fund? Go to the fund’s website and study the information you find there.

3. Check out Morningstar. Visit Morningstar.com and do a search for your fund. You’ll see a wealth of great information including your funds Morningstar rating. This gives you some idea just how well ranked your fund is among its peers. You can also review the rest of the information on the Morningstar site, which I find extremely comprehensive and highly informative.

Finally, always remember that mutual funds, like all investments, have risk. When investing, always keep in mind the need to manage your risk to the degree that youre comfortable and able to sleep at night. While many people will pick their funds and forget about them afterward, while many rely on their fund managers to make money for them, youre ultimately responsible for your own investments and your money. Don’t expect a sympathetic phone call from anyone if your funds lose value. You need to be an active manager of your nest egg. This doesn’t necessarily mean that you need to be an investment guru to succeed as a stock investor, but with some level of monitoring, you can do enough to ensure that your investments are faring as well as they can in the current market environment. With computers and smart phones, you can create a watch list for your funds so you can keep an eye on your portfolios performance. If youre interested in tracking your portfolio, check out this technical stock tool to help in this regard.

Remember that in general, any mutual fund that you invest in for the long term should end up making you money. More important than picking the perfect fund is making sure that you remain invested in equities and other asset classes in a diversified fashion. Furthermore, regular, systematic investing can help you spread your risk over time.

If you enjoyed this post, you can get free regular updates through our RSS Feed. or you can have our latest posts delivered to your email inbox by supplying your address here. Your address will only be used for this purpose, and you can unsubscribe anytime. Share This: Save to del.icio.us Digg This! Stumble It! Submit to Reddit Email This

Categorized under: Investing

Related Posts:

Ive been investing in mutual funds for years but have recently realized I needed to take a more active role plus, I got tired of paying high MER.