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Mutual Fund Strategy

Before one can plan a mutual fund strategy, you need to have a clear picture in your mind of your goals as an investor. You also need to determine the amount of time you have to reach those goals. Investing is time-sensitive, so you will always need to factor time into any investing strategy.

Today, with more than 4,000 mutual funds to choose from, you can be sure there is a fund (or several) that fit your investment style. However, rather than seeking a fund or even a fund category, you should first determine how your portfolio should be set up. It is always much easier to start at the top, with your overall asset allocation plan, and then fill in the pieces, or funds, later. Too many investors go right to the fund selection, chasing the top funds as listed in magazines only to get burned when last year’s winner becomes this year’s disaster.

If you determine your overall investing position based on goals and timeframe, you can lay out a strategy. For example, a young couple, without children, who have a high combined income, can be aggressive in their choices. They may opt to put 80 percent of their investment dollars into riskier, aggressive funds and the remaining 20 percent into more conservative fund investments. They have time on their side and are not averse to taking some financial risk.

Conversely, an older couple, nearing retirement, may opt for the reverse calculations, looking for 80 percent of their mutual fund investments to be in income-generating, safer funds. They want income soon and are not in a position to take risks.Based on your time horizon it is always a better idea to have a more riskier portfolio in the early stages of your plan where the rewards maybe greater, eventually getting back to more safer and long-term funds or even money market funds. Target Date Funds are a prime example of set it and forget it mentality where re-balancing of the investment and portfolio become much more conservative as the end date, retirement time or Target date reaches maturity.

Of course, the above examples are broad generalizations. However, by creating your asset allocation blueprint you will then be able to select fund categories that fit appropriately and allow you to diversify. By diversifying across sectors, caps and fund categories, you lower your overall level of risk. In a sense, a good investor is doing at some level what a fund manager does by choosing diverse investments so that, if one does poorly, the others will more than make up for it.There are exactly 53 distinct mutual fund categories that are inherently part of a broader mutual fund market which are called mutual fund asset classes where all the categorical funds fall into the general group of 10 asset classes. Research, review and insight along with important online tools will definitely help determine the best type of funds or portfolio for the time at hand.

In the late 1990s the technology funds were the rage. If you were willing to take the risk and bank on tech sector funds (and knew when to get out), you could have made a lot of money. While no one sector is flying at that level today, you can take a more aggressive approach by looking at overseas markets and small cap, mid cap and emerging growth funds. In the more conservative portion of the portfolio, you’ll want funds with the large cap blue chip stocks, large cap value funds, income funds and bond funds.

Generally, having five to eight funds in your fund portfolio should meet your investing needs. The key to your strategy is figuring out your time frame, risk level and asset allocation first before looking at mutual fund categories and finally assembling the right type of mutual fund portfolio for you and your particular time horizon.

 


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