Investment Strategies

A mutual fund pools money from many investors and uses it to buy a diversified collection of stocks, bonds or other securities, managed by professionals. For many people they are a practical way to invest without choosing individual securities. A few sound habits improve the odds that a fund will serve you well.

Know what you are buying

• Stock funds aim for growth and are more volatile.
• Bond funds aim for income and relative stability, but their values change with interest rates and credit quality.
• Balanced and target-date funds combine asset classes in one fund.
• Index funds track a market benchmark, while actively managed funds try to beat it.

Time-tested guidelines

1. Start with your goals and time horizon. Match the fund type to when you will need the money.
2. Watch costs. The expense ratio is charged every year and compounds against you. Also look for sales charges (loads) and other fees. Over decades, small differences matter.
3. Read the prospectus. It describes the fund's strategy, risks, fees and performance history.
4. Do not chase last year's winner. Past performance does not predict future results, and top funds often fall back.
5. Diversify across funds, not within overlapping ones. Owning several funds that hold the same stocks gives a false sense of variety.
6. Invest regularly. Putting in a fixed amount on a schedule smooths out the price you pay.
7. Stay the course. Frequent switching usually costs more than it earns, and can create taxable gains.
8. Rebalance periodically to keep your intended mix.

Tax points

In a taxable account, funds pass along dividends and capital gains distributions, which you owe tax on even if you reinvest them. A fund may distribute gains late in the year, so buying just before a distribution can give you a tax bill on gains you did not enjoy. Funds that trade less often, such as index funds, tend to distribute less. When you sell shares, you realize a gain or loss, and the method you use to determine cost basis affects the result. Keep your statements and reinvestment records.

Funds held in IRAs and 401(k) plans do not create current tax on distributions, which is one reason placement matters.

Red flags

• High, unexplained fees.
• Promises of guaranteed returns.
• Pressure to move money from one fund family to another.

The SEC's investor.gov offers tools for comparing fund fees. If you want help with fund choices and their tax effects, contact our firm.