There are tens of thousands of mutual investment funds available on the market. Selecting the best one for your own investments is a risky and arduous task. Mindful of this, here follows a list of 6 characteristics to take into consideration when trying to make some sense of the vast offer of mutual funds.

First things first, one general rule on mutual funds

Before proceeding with our 6 characteristics to look out for when choosing a mutual investment fund, it is important to reiterate a concept which can never be repeated enough: comparing different funds before investing is absolutely essential. You should also check that there are no conflicts of interest between the seller and the product they’re offering.

Mutual funds are, by definition, easily accessible by everyone (in some cases, all you need is a modest sum ranging from just 5 to 100 dollars), which is why the market is brimming with all kinds, ranging from more robust to riskier ones. Therefore, comparing and gathering information is fundamental if you are to avoid any pitfalls which could make you regret the investment. So what characteristics must you refer to when making this comparison?

1 – What is the fund investing in?

Based on different types of mutual fund, it is possible to understand what type of financial instrument our investment will actually fund. For example, typically a bond fund will be less risky but offer lower returns compared to an equity fund. In contrast, a very short-term bond fund (monetary fund) is much less risky than a fund spread out over a longer time frame.

Obviously there’s not such thing as the perfect type of fund: identifying requirements in terms of risks, desired return and duration is extremely important. Based on these factors, it is possible to choose what type of common investment fund is for you.

2 – How much does it cost to invest in a fund?

In a mutual fund, commission fees are the main expense incurred and are charged each year by the asset management company for management services and for consultancy services by the bank, financial promoter or asset management companies once more.

The more complex a fund, the higher the commission fees charged. For example, a monetary fund will generate lower commission fees compared to an equity fund. In order to bring down commission fees, some asset management companies create execution only funds, without a consultancy service.

3- Are there performance commissions? Is there a high-water mark?

So called performance commission fees (or incentive commission fees) are incurred by the saver whenever fund return is especially positive and therefore acts as an incentive for the broker company in terms of generating return. However there are different ways for calculating these commission fees and not all of them hold in the favour of savers. Therefore it is best to seek out funds which apply the high-water mark method (absolute or relative), without periodic resets.

Indeed this method best aligns asset management company interests with those of the client as the saver only has to pay when fund value exceeds an absolute value.

4 – what are entry or exit commission fees

Some funds and some purchasing methods in particular, require the payment of entry or exit commission fees, or fees for switching from one fund to another. It is important to bear this in mind.

5 – Is there a benchmark? If yes, what is it?

The benchmark is an index used to evaluate fund trend with respect to the reference market. Not all mutual funds have one: for example, flexible funds are intrinsically devoid of them. However when there is a benchmark, it is undoubtedly a significant parameter for assessing fund trends and suitability of performance commission fees.

6 – What about returns over previous years?

It is important to highlight that previous performance levels do not guarantee future positivity. However, checking over the years and for different funds, that return is higher than the benchmark and competing funds is one way of assessing the skill of the manager and the asset management company.