Mutual Funds are investment products that pool money from various investors and collectively invest them in financial instruments like bonds and stocks according to their respective financial objectives. Investing in mutual funds allows the investors to access long term assets like equities, bonds, commodities, fixed income securities, and bullions.
Mutual Funds are created by the Asset Management Company (AMC) with a dedicated asset manager who assigns units to the investors according to the quantum of money they invest in the scheme. Investors can purchase or redeem these units at the current NAV (Net Asset Value). The NAV may vary according to the underlying assets. Investing in Mutual Funds allows investors to diversify their long-term portfolios at comparatively lower investment rates, which immensely benefits them in the long run.
Mutual Funds have their advantages and disadvantages as compared to directly investing in stocks or other financial instruments, and therefore it isn’t easy to answer which is the best mutual fund.
WHere are some of the advantages and disadvantages discussed below:
1) Wide variety of options
There are hundreds of large-cap, mid-cap, and real estate companies that offer various schemes to the investors that the investors otherwise do not get when they invest directly into individual stocks. Investors can pick any scheme based on their financial objectives and risk tolerance levels. For example, for aggressive investors who can withstand the long term volatility of the stock market, there are equity-based schemes. For more moderate investors who look for both income and capital gains, there are Balanced Funds schemes, and for the more conservative investors who want preservation of their regular earnings, the bond funds seem to be the most suitable ones.
2) Professional Money Management
There are dedicated managers appointed by every company who are entrusted with the responsibilities of looking after the individual requirements of the investors. Fund managers have postgraduate degrees in finance, along with several years of management experience in stock analysis and investments. Major large-cap and mid-cap companies and also some real estate companies use the services of both in-house research staff and also the external research firms to determine the profitable composition of portfolios. Fund managers also use information technology and hi-tech strategies to rebalance portfolios and hedge them against market volatility.
3) Low Management Fees
Owing to the low management fees, small investors are also showing interest in investing in various schemes. Investors can participate in the dividend distributions and capital gains of numerous large-cap companies at the price of an average stock, and for this, the investors don’t need to spend a heavy amount separately. Mutual fund companies spread the management expenses like research and commissions over a larger asset base, and therefore the individual expense ratio can be reduced to a great extent, thereby benefiting the individual investors.
4) Diversification of Assets
Just as the management expenses of a scheme can be reduced by spreading the total expenses across various assets groups, Mutual stock funds also serve as cost-effective ways to diversify investors’ portfolios across different industries and asset categories. It allows investors to monitor multiple stocks simultaneously without buying all of them individually; they can achieve a broad diversification of assets just by buying a few mutual stocks, thereby immensely reducing the costs.
Investors can also achieve broad diversification in separate asset categories; for example, they can buy mutual stock funds that invest in specific industry sectors within equities, such as energy and technology. Similarly, there are international mutual stocks and also other emerging market funds that invest in various locations, thereby helping investors to achieve diversification beyond the geographical boundaries. Then there are also index mutual stocks with the lowest management fees due to their redundancy in training and research-related costs that will add to the advantages of small investors. Index mutual funds that invest in various markets also help the investors in tracking major market and industry indexes.
5) Dividend reinvestment
After the funds declare the dividends, investors can use those dividends in purchasing some extra shares of the mutual fund, thereby letting the investments grow.
1) High Expense Ratio
Mutual funds expense ratio and sales charges may sometimes go out of control if the investors are not cautious when investing in funds. The Expense ratio higher than 1.20% is considered at the highest cost end.
2) Tax inefficiency
Investors cannot control capital gains payouts in mutual stocks. Investors continuously receive distributions from the fund from turnovers and security holdings that may attach highly uncontrollable taxes.
3) Fluctuating returns
Mutual funds are typical investments without a guaranteed return, so there is always a possibility of depreciating the stock values. Equity mutual stocks experience most of the price fluctuations as compared to other mutual stocks.
Weighing these pros and cons will help investors to determine which mutual fund is best.
How to Choose the Best Mutual Funds?
Therefore, choosing the best mutual stock amongst a wide range of options is challenging, and the best way is to weigh the pros and cons that each mutual stock scheme offers and then comparing them with your risk tolerance levels. Investors buy mutual stocks directly from the mutual stock companies or through a broker for the stock. The price that the investors pay to buy the mutual stock units is the mutual fund’s per share (NAV) net asset value plus any fees that are charged by the company at the time of purchase of the fund units.
Mutual Funds are subjected to market risks, and therefore before you buy mutual fund shares, you should carefully read the scheme’s prospectus. The prospectus contains information about the mutual stock scheme’s objectives, the risks associated with it, the stock’s performance, and the long-term related expenses that the investors need to bear. But, what mutual funds should you invest in, here is how to choose the best mutual fund:
Identify your goals and risk tolerance levels
Before investing in mutual funds, it is of utmost importance for investors to identify their investment goals. They want long-term capital gains, or income from the investment, or the purpose that they want the mutual funds to be used for, and accordingly, they can invest in the schemes that match their financial objectives. Identifying the goals will help investors in streamlining their search for the best mutual funds.
Apart from this, the risk tolerance levels of the investors should also be considered, whether they can withstand dramatic swings in portfolio value, or they want a more conservative investment. As risks and returns come hand in hand in a mutual fund scheme, the investors must balance their expectations for returns against their abilities to tolerate risk levels.
The investors should also take into consideration how long they intend to hold the investments, do they anticipate any concerns about the liquidity of the funds held or not. All these questions will help investors select the right mutual fund scheme that would earn them high returns.
Understand the fees and charged by various mutual fund schemes
Mutual fund companies make money by charging fees from the investors; however, the fees vary according to each scheme’s objectives and nature. Therefore, it is very important to understand the different types of fees charged with an investment before an investor makes a purchase.
The sales fees charged by some companies are termed as “load.” A Load is either charged at the time of purchase of the stocks or at the time of sale of the investment. Then there are “front end loads” and “back end loads” that are charged at the time of initial investment when the shares are purchased, or at the time when the shares are sold respectively. The back-end load typically applies when the stocks are sold before a prescribed time, which is usually 5 to 10 years from the date of purchase. These fees discourage the investors to buy and sell funds units too often.
Apart from these fees, it is also important that the investors also consider the management expense ratio to understand the concepts of sales charges. The higher the expense ratio, the lower will be the investor’s return at the end of the year. Therefore, it is very important to select the fund after considering the expense ratio.
Select the type of funds
Select the fund type by looking at the financial objectives of the schemes; for example, if you want to use the fund for a long term objective like for funding your child’s education that are distant future, you can invest in Equity Funds, or if you need the money sometimes in the near future, you can opt for the Liquid Funds, or if you need a regular income, then a Monthly Plan would be the best for you.
Active or passive management
Investors should determine what they want, an actively managed fund, or a passively managed fund. Actively managed funds have dedicated portfolio managers who are experienced professionals with years of practice in investment analysis. They make decisions regarding the addition of securities and assets in the fund scheme so that the investors can reap the maximum benefits. They do in-depth research on various asset classes and consider which industry sectors and macroeconomic factors would be the most lucrative while making investment decisions.
Passively managed funds often termed as index funds, duplicate the performance of a benchmark index. However, a passively managed fund scheme’s fees are generally lower than the fees for actively managed funds. Also, the Passive funds do not trade their assets very often, unlike Actively managed funds, unless there is a change in the benchmark index. This low turnover reduces the expense ratio to a great extent.
Passively managed funds are also well-diversified with thousands of holdings, but as these funds do not trade as much as active funds, they create much less taxable income, which serves as a great plus point for non-taxable individuals. Therefore, if you want your assets to trade, often go for actively traded funds or otherwise reap the benefits of a lower expense ratio by investing in Passively managed funds.
Evaluate the past results of the mutual fund company
Before investing in any fund scheme, it is very important that the investors research the company’s past results. Whether the fund manager could generate positive results consistently at par with the general market returns, or were the funds more volatile than the market indexes, or were there high turnover that imposed high tax liabilities on the investors, etc. All these questions would help the investors in choosing the most suitable mutual fund for himself by revealing the historical trend of the fund scheme in terms of return and generated turnover.
Going through the fund’s prospectus will throw some light on the investment literature of the company and will also give some idea about the fund’s prospects and its holdings in the years to come. Apart from this, the firm’s performance with respect to the market’s changing trends also serves as an important indicator about the viability of the funds.
Best Mutual Fund Companies in the U.S.
The U.S. has a very large mutual fund market with thousands of individual funds as well as funds families available, each vying for the investors’ funds, which makes it very complicated to choose the best one. The best way is to list all of the index funds for any given fund family, add up their combined total AUM or the assets under management, and then compare which company the investors have collectively poured in the maximum fund. The biggest fund families are the ones that have served millions of investors over time.
Based on the performance to serve the investors in the best way, three of the top mutual fund companies are discussed hereunder in details:
Which Mutual Funds are the best?
The New York City-based BlackRock, Inc, one of the top mutual fund companies in the U.S., having its headquarters in New York City, released its first index funds in the year 1998 in collaboration with PNC Financial Services Group. The company carries its operations under the name iShares instead of BlackRock. The company saw its boom between 1999 and 2009 after incorporating the elaborate risk-management theory of investment analysis and fund management and served the shareholders very well during economic downturns.
During its initial stages, BlackRock dealt only with mortgage-backed securities (MBS) investments, but soon it expanded its horizon and released the iShares MBS Fund in 2007. This was just a few months before the global financial crisis broke down, but luckily iShares managed to escape the crisis without its investors facing huge losses.
The U.S. government bailed BlackRock out during the crisis, and also, the White House considered it to continue the functioning of its financial system even during the mid-crisis panic, which served as a blessing in disguise for the company.
Charles Schwab has been in the list of the best mutual funds in the U.S. for almost five long decades now, without its grandeur has faded. It focuses its primary fund offerings on index funds, which are also known for their low expense ratio and no minimum investment.
The Vanguard group is probably the largest fund company in the U.S. that has been long serving its investors for years. As such, it has been posing a tough competition to the iShares series released by BlackRock. Vanguard group is known for its wide selection of index funds offerings that count over 190 in the U.S., their low expense ratio, and a very history of yielding positive returns.
Apart from these fund families, there are individual fund providers like Wells Fargo, which is also the U.S’s largest investment firm. These fund providers own the entire fund family; for example, Wells Fargo owns the Wells Fargo Advantage Funds, which is the fund family of Wells Fargo. Fund providers handle more than one fund family brand and funds. As such, they are more focused on fund families rather than on just fund providers.
Therefore, mutual funds are excellent investment tools to grow personal finance, but it is very difficult to answer the question – what’s the best mutual fund. However, owing to the inherent risks of market fluctuations, many investors shy away from investing in Mutual Funds. But if an investor selects a fund as per his financial objectives and risks tolerance levels, then there is no chance that his investments will go wrong.
1. What are the best mutual funds to invest in 2020?
The DSP BlackRock, Delaware Smid Cap Growth Institutional, DHFL, and Franklin are among the top international stock funds to invest in 2020. These are also listed in the S&P 500 index.
2. What are the top 5 mutual funds?
Delaware Smid Cap Growth Institutional, American Century Focused Dynamic Growth Investor Class, Lord Abbett Growth Leaders F, Hartford Growth Opportunities HLS IA, and Fidelity Advisor Growth Opps Z are the top 5 Equity funds listed in the S&P 500 index.