Best Tips on Investing in Mutual Funds

8 Tips on Investing in Mutual Funds: Basics for Beginners

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••• Get tips on investing mutual funds and be a successful investor. Danita Delimont/Gallo Images/Getty Images

If you're looking for tips on investing in mutual funds, it's smart go back to the fundamentals of choosing the best funds and how to build a portfolio. Check out this easy list to get started or to get back on track toward investing success.

Here are the 16 best tips for investing success with mutual funds, from beginning the financial planning process, to selection, to analysis to building a portfolio, to taxation and more...

Investing in Mutual Funds Tip # 1: How to Get Started Investing

Investing begins before buying the first mutual fund (or prior to buying the next one). If you are just getting started investing with mutual funds, you may want to try beginning with a balanced fund. You will also want to ask questions: What is it that you would like to accomplish with your savings? Do you have specific goals, such as saving for retirement, or do you have some broadly defined goals, such as the accumulation of wealth for the general purpose of strengthening your financial security?

What is your time horizon? One year? Five years? 10 years?

Investing in Mutual Funds Tip #2: Know Your Risk Tolerance

Before choosing your funds, you need to have a good idea of how much risk you can tolerate. Your risk tolerance is a measure of how much fluctuation (a.k.a. volatility—ups and downs) or market risk you can handle. For example, if you get highly anxious when your $10,000 account value falls by 10% (to $9,000) in a one-year period, your risk tolerance is relatively low—you can’t tolerate high risk investments.

Investing in Mutual Funds Tip #3: Determine Your Asset Allocation

Once you determine your level of risk tolerance, you can determine your asset allocation, which is the mix of investment assets—stocks, bonds and cash—that comprises your portfolio. The proper asset allocation will reflect your level of risk tolerance, which can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).

Investing in Mutual Funds Tip #4: Review the Basic Types and Categories of Mutual Funds

Mutual funds are organized into categories by asset class (stocks, bonds and cash) and then further categorized by style, objective or strategy. Learning how mutual funds are categorized helps an investor learn how to choose the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories that further describe the investment style of the fund.

Investing in Mutual Funds Tip #5: Learn How to Choose the Best Funds

With thousands of mutual funds to choose from and hundreds of different fund families offering them, an investor can suffer from choice overload and possibly make needless mistakes. Without a doubt, no-load funds are the best choice for mutual fund investors.

Now that you know your asset allocation, you need to begin choosing the best mutual funds for you and your investment goals. If you have a broad choice of mutual funds you begin by using a fund screener or you may simply compare performance to a benchmark. You’ll also want to consider important qualities of mutual funds, such as fund fees and expenses (see the Expense Ratio), and manager tenure. Most importantly be sure to choose a diverse selection of funds that combine to suit your risk tolerance and investing goals.

Mutual fund research can be made easier with a good online research tool. Whether you are a beginner or a pro and if you are looking to buy the best mutual funds, review an existing fund, compare and screen different funds or you are just trying to learn something new, these mutual fund research sites are among the best.

Past performance of a mutual fund may not be a guarantee of future results but if you know how to analyze performance--if you know what to look for and what to avoid--you can make better investment decisions.

If you guess that the best S&P 500 Index funds are those that have the lowest Expense Ratios, you are mostly correct. However, in addition to low costs, there is a delicate balance of science and art to indexing that makes only a few mutual fund companies able to offer the best index funds.

Investing in Mutual Funds Tip #6: Build Your Portfolio of Mutual Funds

Building a portfolio of mutual funds is similar to building a house: There are many different kinds of strategies, designs, tools and building materials; but each structure shares some basic features. To build the best portfolio of mutual funds you must go beyond the sage advice, "Don’t put all your eggs in one basket:" A structure that can stand the test of time requires a smart design, a strong foundation and a simple combination of mutual funds that work well for your needs.

Investing in Mutual Funds Tip #7: Know the Basics on Mutual Fund Taxation

How does one reduce taxes on mutual funds? Which types of funds are best for taxable accounts? Why did you receive a 1099? Understanding mutual fund taxation will help you improve your overall returns by being a smarter investor. As they saying goes, "Nothing is sure in life but death and taxes." However, taxes can be minimized or even avoided with regard to mutual fund investing. Therefore, with knowledge of the basics on mutual fund taxation, you will be enabled to increase your overall investment portfolio returns.

Investing in Mutual Funds Tip #8: Avoid the Dave Ramsey Mistake

Dave Ramsey is a good entertainer and seems like a genuinely nice person. However, with regard to mutual funds in specific, his investment philosophies are bordering on dangerous. Mutual fund investors can get some good tips from his talk radio show but they are wise to understand the difference between entertainment and sound investment practices.

Be sure to check out this article on what Dave Ramsey gets wrong with mutual funds.

Armed with just a handful of tips on mutual funds, investors can do well to build their own portfolios. But remember that mutual fund research, analysis and portfolio management is not for everyone. If you don't enjoy doing it, chances are you won't be good at it.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.