Mutual funds are investment tools. Basically, they are "A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed."

Question. Why do so many people claim that mutual funds are like buying time bombs? Is there any basis?

Well, looking around, you will find that purchasing a mutual fund encompasses high sales charges, high commission and management fees. Most banks charge somewhere between 4-5% sales charge and the investment manager typically commands a 1.5-2% management fee. In other words, the fund that you choose has to make a return of 6-7% before you can even break even! Pretty darn tough business.

In addition, you may potentially lose all your investment if you do not know what kind of fund you are buying into! Many 'investors' make the mistake of buying the current top performing fund. Or, they may buy funds that project a super growth of 60-70%! While the figures look very tempting, I want you to take a step back and think. Just for a moment. If buying funds were that easy, and if they truly delivered 100% of the time, who would be working?

Imagine how rich you will be earning 60% interest year-on-year on your initial investment. Next, imagine what the world would be like if everybody made the same 60% just by buying the same 'hottest performing' fund. Does it make much sense to you? It certainly doesnt to me.

In order to achieve consistent returns on your investment, you have to search and identify the top 1% of funds - out of a universe of 8000. How do you do this?

Before you start scratching your head, praying for an answer, read on.

4 steps. Only 4.

You heard me right. And you will be on your way to investing together with the top investors.

Step 1. Historical Performance
The chosen fund has to have beaten the S&P 500 consistently for the past 5 years min. In addition, it also has to have beaten funds in the same category over the past 3 years.

Step 2. Excellent Management
Similar to selecting stocks, when you choose funds, you want to make sure that the fund managers are trustworthy. You also have to ensure that the team or individual managing the fund has been doing so for the past 5 years min.

Following that, you may want to consider checking up on the current size($) of the fund. Having too large a fund may indicate future difficulties in management and growth. Too small a fund may hinder the purchasing power. Ideally, funds should range between 50mil to 3bil in size($).

Step 3. Super low expenses
This step can be further broken down into 2 sub groups.
i) No loading (front or back). This means that youre looking for funds with as little expense as possible.
ii) Funds chosen should have the lowest expense ratio in their category.

Step 4. Minimal risk
i) High sharpe ratio. Greater than 1.
Please refer to investopedia for detailed definitions.
ii) As little standard deviation as possible.
This is a measure of the shape of the graph. What you want to look for is something that does not fluctuate too much.

Finally, what you can do to make life easier is to visit morningstar and make use of their mutual fund screener! I have been using that since I started investing and boy does it help!

I sincerely hope this will help you reach your goal in life - to be financially free, to have more time to do quality things in life. Cheers!

Jeremy Neo
retire-rich.blogspot.com