How to choose investment funds: what to do and what to avoid

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This article is reprinted with permission from NerdWallet. This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities. More than half of Americans (53%) say they currently invest in exchange-traded funds, mutual funds or index funds, according to a new survey from NerdWallet. This same group of respondents shared what factors they consider when choosing investments, and while some are important considerations, others probably shouldn’t be a primary concern.

Here are some practices you may want to adopt in your own investment research, as well as ones you might want to avoid. What to consider when choosing funds 1. Be aware of growth, but don’t try to predict the future According to the NerdWallet survey, 44% of Americans who invest in ETFs, index funds, or mutual funds say they choose funds based on the potential for future growth and 32% choose them based on historical growth. You can compare past track records of funds, but it‘s important to understand that past performance is no guarantee of future growth. And rather than trying to identify which narrow sector will prosper in the future and invest there, you may want to choose a broad index fund that reflects the performance of a market index, such as the S&P 500 SPX, + 0.42%, which is has been shown to produce returns. on a longer time horizon. Passively managed index funds and ETFs tend to be low-cost options for those who want a hands-off way to diversify their portfolios. Minimize costs so returns are not eaten The survey shows that about 3 in 10 Americans who invest in ETFs, index funds or mutual funds (28%) say they choose funds based on which have low fees. Again, passively managed funds tend to have lower costs, while actively managed mutual funds can be more expensive as investments are chosen by a human advisor. See also: How Real Estate Fared During the Pandemic When evaluating costs, an important factor to consider is the fund’s expense ratio. This is an annual fee expressed as a percentage of your investment. You should compare the expense ratio of the fund you are considering to that of other similar funds to ensure that you are evaluating it in context. While 1% may seem like a low fee, it could cost tens or even hundreds of thousands of dollars more over time than a fund with a 0.25% expense ratio. 3. Consider social impact if that’s a priority for you About a quarter of Americans who invest in ETFs, index funds, or mutual funds (24%) say they choose funds that comprise companies or industries that align with their beliefs, based on the survey. Socially Responsible Investing, or SRI, is gaining popularity and allows investors to choose funds made up of companies that do good in the world, such as promoting racial equality or having sustainable practices. “Doing good” means different things to different people, but you can start by seeking funds based on factors that matter to you. Remember to check the expense ratios of any SRI fund you are interested in, as you may find that some have higher fees than traditional funds What not to consider when choosing funds Word of mouth According to the survey, among Americans who invest In ETFs, index funds or mutual funds, 19% say they choose funds recommended by their loved ones and 13% say they choose funds discussed in the media. Even if your loved one is a financial professional or financially savvy, it may not be a good idea to get investment information from friends and family. Learn More: How to Buy Stocks, Bonds, and Mutual Funds Do your own research instead. Also, the investments discussed in the media may not be the most appropriate for your needs. And consider your personal financial goals, risk tolerance, and the amount of time you have to invest when choosing your investments. More from NerdWallet Erin El Issa writes for NerdWallet. Email: erin@nerdwallet.com.