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Checklist for Investing in a Mutual Fund


Before you pony up cash for an investment, first dedicate time for doing some homework. Outlined below are several key questions to consider before investing in a particular mutual fund. You can find these answers in a fund’s prospectus.

Prior to investing in any mutual fund, carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. Free prospectuses may be ordered from the fund company or send a request to [email protected]. Many but not all prospectuses are available online. Not all mutual funds are available through TradeKing. Read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.



Factors to Consider

Why They're Important

What is the fund's investment objective?

There are three general investing goals: growth through capital appreciation, periodic payments of income, and protection of your initial investment. A fund may focus on one or more of these goals.

What role will this fund play in my portfolio?

A diversified portfolio has a variety of funds that invest in different asset classes. You should understand what a fund invests in, how it fits into your overall portfolio, and how it attempts to achieve its investment objective.

Is the fund actively managed or does it track an index?

The return of an actively managed fund depends in part on the manager's selection and timing of individual securities. A passively managed fund is generally designed to try to match that of a given index of securities--for example, the S&P 500.

What is the fund's short-term performance record?

Investing styles and asset classes tend to move in cycles. A fund that has done well recently may be benefiting from such a cycle, which may or may not continue.

What is the fund's long-term performance record?

A fund's prospectus must list its total return for each of the past 10 years. Comparing long-term performance can indicate how a fund has performed through various market cycles. Bear in mind that past performance is no guarantee of future results.

How widely has the fund's performance varied from year to year?

A fund's standard deviation tells you how great the range between a fund's highs and lows might be. The higher the standard deviation, the more a fund's performance may vary from its average year-to-year performance, and the more volatile it may be from year to year.

How long has the current manager run the fund?

If a manager is relatively new to the fund, its past performance record and strategy may not accurately reflect its current style and performance.

How consistent is the fund's approach to achieving its goals?

Funds sometimes undergo what is known as "style drift"--subtle changes in the way it invests or what it invests in. Style drift is not necessarily a negative, but you should be aware of how flexible a fund's strategy might be, and how it might fit with other investments in your portfolio.

What is the fund's turnover ratio?

A fund that trades frequently may generate high taxable capital gains, even if the fund has had a negative return, and also will have higher trading expenses than a lower-turnover fund.

How do taxes affect this fund?

Some funds are best held in taxable accounts--for example, municipal bond funds.

Mutual funds must distribute all capital gains and dividends to shareholders each year. Those distributions are generally taxable. Some funds are managed to maximize tax efficiency.

What is the fund's expense ratio?

Knowing a fund's expense ratio--what you pay for the fund's annual operating costs--can help you judge whether it operates efficiently and whether higher expenses are justified by the fund's returns.

What fees and sales charges, if any, are charged, and how are those charges structured?

Depending on how long you intend to hold the fund and how the sales charges are structured, a fund with a sales load may or may not be more cost-effective than a no-load fund.

Sales charges may be reduced for larger investments; find out about a fund's breakpoint levels.

What type and level of risk does this fund involve?

A fund's prospectus must contained detailed information about the type of risks to which the fund's investors are exposed.






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