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How to Choose the Right Mutual Funds

When we talk about investing in mutual funds for retirement, we always encourage people to choose “good growth stock mutual funds.” But with thousands of funds to choose from, how do you know which ones fit the bill?

How Do You Pick Mutual Funds?

Mutual funds are like people. The only way to separate the good ones from the not-so-great ones is to get to know them. But unlike people, you can find all the important information about a mutual fund on its printed prospectus or online profile. Here are six important features you’ll need to review as you select funds to invest in:

1. Objective

This is a summary of the fund’s goal and the types of investments it will make to achieve that goal. Your investments should be spread evenly between these four types of mutual funds: growth and income, growth, aggressive growth, and international.

2. Fund Manager Experience

You want an experienced manager calling the shots for your mutual fund­—someone with at least five to 10 years of experience. Keep in mind, though, that many managers mentor their successors for several years. So, a fund with a new manager can be worth considering if the fund has consistently performed well.

3. Sectors

Sectors refer to the types of businesses the fund invests in, such as financial services or health care. A fund that is invested in companies across a wide range of sectors means the fund is well diversified. That’s what you’re looking for, because you don’t want your retirement future to depend on companies from one particular industry (in case that industry just so happens to collapse).

4. Performance (Rate of Return)

You want to choose funds that have a history of strong returns. Focus on long-term returns—10 years or longer if possible. You’re not looking for a specific rate of return, but you do want a fund that consistently outperforms most funds in its category.

5. Cost

You should invest in mutual funds that are front-end load funds. With this type of fund, you pay fees and commissions up front when you make your investment. This approach allows your money to grow without being bogged down by expensive management fees. Also pay attention to the fund’s expense ratio, which is a collection of fees that help cover the costs of managing the mutual fund. A ratio higher than 1% is considered expensive.

6. Turnover Ratio

Turnover refers to how often investments are bought and sold within the fund. A low turnover ratio of 10% or less shows the management team has confidence in its investments and isn’t trying to time the market for a bigger return. If you see lots of turnover, it’s not the right fund for you.

Need Help Picking Mutual Funds? Get a Financial Advisor

If this sounds like a lot of information to dig through and compare, that’s because it is! The good news is you don’t have to do it all alone. You can work with an investment pro who understands the ins and outs of the market but recognizes that you’re in charge of selecting your own retirement investments.

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Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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