Selecting mutual funds

Selecting mutual funds

What is the purpose of your investment?

However, the higher return offered by stocks is accompanied by price volatility. When you invest in a fund, you shouldn't just look for the highest return. You should look for a balance of price stability and good returns.

If you're retired and need steady income from your investments because you no longer draw a salary, you shouldn't invest all your money in an aggressive growth stock fund that pays few dividends. In this case, you'll probably need a good bond fund that will pay you interest on a monthly basis, and perhaps a blue-chip stock fund that will pay you good dividends but still has a chance for some growth.

If the purpose of the money is to serve as a cash management fund for paying off credit card bills and the like, you probably should put the money in a money market mutual fund. You won't get rich off of a money market fund, but you shouldn't have any nasty surprises either. And, as a bonus, money market funds won't complicate your taxes with capital gains transactions.

Finally, if the money is part of your retirement nest egg and you're only 35 years old, you probably should pick a mutual fund that invests heavily in a variety of stocks.

Maturity matching

Here's another way to determine which fund to invest in. Use something I call maturity matching. Maturity matching means that you should match the maturity of your investment to the time horizon of your goal.

For example, if you need a fund to pay off short-term bills, use a money market fund because money market funds invest in securities that mature within 90 days.

Likewise, if you're saving for a home downpayment that's two years away, you might want to invest in a short-term bond fund whose average maturity is two to three years.

And if you're investing for retirement which is twenty years away, think about investing in a mixture of growth stocks and long-term bonds.