
by Piyusha 16 Oct 2006, 01:38
As with any investment, a fund's past performance is no guarantee of its future success. Over the long-term, the success (or failure) of your investment in a fund also will depend on factors such as:

# the fund's sales charges, fees, and expenses;

# the taxes you may have to pay when you receive a distribution;

# the age and size of the fund;

# the fund's risks and volatility; and

# recent changes in the fund's operations.

So, look at more than the fund's past performance when making your investment decisions. Read the fund's prospectus and shareholder reports, and consider these tips:

Scrutinize the fund's fees and expenses.

Know how the fund impacts your tax bill.

The law requires a fund to make a capital gains distribution to shareholders if it sells a security for a profit that can't be offset by a loss. If you receive a capital gains distribution, you will likely owe taxes on it - even if the fund has had a negative return since you invested in it. For this reason, you should call the fund to find out when it makes distributions so you won't pay more than your fair share of taxes. Some funds post that information on their websites.

Consider the age and size of the fund.

Before investing in a fund, read the prospectus to find out how long the fund has been operating and the size of the fund. Newly created or small funds sometimes have excellent short-term performance records. Because these funds may invest in only a small number of stocks, a few successful stocks can have a large impact on their performance. But as these funds grow larger and increase the number of stocks they own, each stock has less impact on performance. This may make it more difficult to sustain initial results. You can get a better picture of a fund's performance by looking at how the fund has performed over longer periods and how it has weathered the ups and downs of the market.

Think about the volatility of the fund.


Factor in the risks the fund takes to achieve its returns.

Read the fund's prospectus and shareholder reports to learn about its investment strategy. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. For example, a fund that invests primarily in stocks whose prices may change quickly - like initial public offerings or high-tech stocks - will usually be riskier than other types of funds. But remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean it does not have significant risk. For example, the fund's investments could be very sensitive to interest rate changes. Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you.

Ask about recent changes in the fund's operations.


Check the types of services offered and fees charged
by the fund.

Read the fund's prospectus to learn what services it provides to shareholders. Some funds provide special services, such as toll-free telephone numbers, check-writing privileges, and automatic investment programs. You should find out how easily you can buy and sell shares and whether the fund charges a fee for buying and selling shares. You can expect funds that require extra work by their managers, such as international funds, to have higher costs.

Assess how the fund will impact the diversification
of your portfolio.

Generally, the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes - stocks, bonds, and cash - rather than on the particular securities you hold. When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk