How to Plan Mutual Funds
- 1). Set your financial goals, as they will determine the amount of risk you take with your mutual fund. High-risk mutual funds can make a large sum of money quickly, but can also lose money in a flash. Low-risk mutual funds will not earn money quickly, but have the potential to grow steadily over the life of the fund.
- 2). Choose the level of diversification for your mutual fund. A mutual fund derives its name from the fact that it is a package that compiles stocks, bonds, and other financial items from multiple sources. If you plan your portfolio to be highly diversified, you are essentially investing in a variety of industries and companies, protecting yourself against economic downturns. Sector mutual funds can earn a larger return more quickly, but can lose significantly if the target industry has a downturn.
- 3). Select whether you want a closed or open-ended mutual fund. Open-ended funds are beneficial if you want to take out or add money at any time during the life of the product. Close-ended mutual funds behave similarly to traditional stocks in that they have a definite maturity life. During the life of the fund, you cannot take out or add money. The benefit to this type of fund is that you receive a discount on mutual fund start-up costs and expenses.
- 4). Check the performance metrics of a mutual fund that is similar to yours. Performance reports provide an estimate of the potential performance of your mutual fund. If you see that the performance is not to your comfort level, you should modify your choice to reflect your expectations.
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