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How to Avoid a bad Mutual Fund / Unit Trust Fund

Follow some basic tips and you will avoid picking the wrong mutual fund / unit trust fund.



We have all heard about the advantages of investing in a mutual fund over trying to pick individual stocks. First of all, mutual funds hire professional analysts that are market experts and devout many hours of study to the various stocks. Unless you want to devout a large portion of your free time to the study of the financial reports, you probably won't have as much information to make a decision as a mutual fund manager.

Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk.

Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.

Given the above advantages, it's no wonder that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose from, so how does one make a selection? Here are a few tips:



Tips 1
Do not be seduced to jump on the recently performing best fund. It may seem like the safe and rational thing to do, but like individual stocks, you want to buy low and sell high, not buy high and pray for more growth.


Tip 2
Even good funds may not be able to overcome the force of the overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Read the prospectus closely to understand what these are. One of the best way is to sit down with you mutual fund agent / unit trust consultant to discuss further for making better decision.

Tip 3
Limit the number of funds that you own. Unless you are trying to simply achieve the same returns as the broad market, diversifying into many mutual funds will not reduce your risk or increase your return by much.

Tip 4
Funds that become too popular and too big of the fund size tend to slip in performance. There are several reasons for this.

Tip 5
Always find a good and experienced unit trust consultant to provide you his or her point of view on your selection. They are the professional to deal to these funds and always in the market. An experienced UTC will always give you at least more than 2 options on your fund selection and solutions on your portfolio.

 


One final point to keep in mind is that the type of fund will totally depend on your investment objectives. There are certain funds that are designed for your objectives be their retirement, income, growth, funding the kids college, etc.

Happy invest.


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