Mutual funds have long been popular investments as part of a diversified portfolio. But are you getting the rate of returns on your mutual funds that you should be? Do the fees and expenses associated with the mutual fund outweigh its returns? Contrary to popular lay thought, long term success of a mutual fund is in no way a guarantee of future success. Here are some facts to know about mutual funds before investing in one or more.

— Never make blanket assumptions based on past performance

Don’t assume that because a mutual fund has a stellar performance history that it will continue to do so on an indefinite basis: the market simply doesn’t work that way. It is imperative that a potential investor take the time to carefully study a fund’s prospectus and read shareholders’ reports to get a more accurate idea of what’s really going on now and to get a better feel for what may be in store in the future. Perhaps the mutual fund will actually continue to live up to its past performance, but never use its record as the only criterion for investment.

— It’s all in the timing

Because an investor must pay capital gains taxes on profit distributions that come from a mutual fund, he should be careful about when he times his investment in the fund. A mutual fund will generally make distributions on a regular basis; if you jump in at the wrong time, you may end up paying an unfair portion of the taxes on that distribution. Only invest in the fund right after it makes a distribution to avoid this dilemma.

— Do the fees and expenses match the returns?

All mutual funds charge fees and expenses to shareholders. If the fee for one fund is high, then you’d better be sure that you will be making enough return on your investment to make that fee worthwhile, especially over the long term. It’s amazing how much these fees can eat into your profits, so beware.

— Does the fund have a high turnover rate?

As with general fees and expenses, a fund that is turning over its portfolio frequently leaves itself vulnerable to more capital gains taxes and leaves its shareholders paying higher trading costs. You may wish to invest in a fund with a much lower turnover rate to keep additional costs from cutting your profits. A fund that deals with high-volatility stocks is a much higher risk to your money, of course, so choose wisely.

Article Source: Articles Engine

Fenimore Asset Management, Inc (http://www.famfunds.com) is an independent investment advisory firm located in the picturesque Schoharie Valley town of Cobleskill, New York. Thomas O. Putnam founded Fenimore in 1974. Art Gib is a freelance writer.