How to Identify a Profitable Equity Mutual Fund

Investing in an equity mutual fund allows you to get involved in the stock market, without directly investing in individual stocks. An equity mutual fund is one that is made up entirely of stocks and has a high potential for capital growth. Here are a few tips on how you can identify a profitable equity mutual fund to invest in.

MorningStar Ratings

When you are trying to identify a profitable equity mutual fund, one of the first places you should start is MorningStar. MorningStar is the leading financial authority when it comes to rating investments. They have a very detailed rating system that deals with many different types of mutual funds. You should be able to look at the equity funds category and see which funds are rated highly. They will utilize a five star ranking system with those funds that have five stars being the best. Any fund that has a five star ranking, is in the top 10% of their class according to MorningStar. This will help you narrow down your possible selections between equity mutual funds.

Risk

The risk level associated with the fund is another important factor to consider. Choosing a fund that shows a high rate of return typically means that the fund had to take additional risk to achieve those gains. As an investor you need to find funds that match your personal risk tolerance level. Otherwise, you may find yourself involved with a fund that is much riskier than what you are comfortable with.

Returns

You will also want to take a look at the returns that this type of fund has provided. Look at the historical performance for the last 5 years, and place heavy emphasis on the year prior. Looking at the performance of the fund is a good way to compare against other funds. The point of investing in mutual funds is to make money, therefore, you want to find a fund that has a good track record. Look at the projected returns for the next year and see what they expect.

Choose What You Know

When looking at mutual funds, you will immediately notice that there are many different types of funds available. Many mutual funds will invest in a certain sector or industry. This allows you to invest in topics that you know something about and take advantage of potential opportunities. For example, if you happen to work in the medical industry, you could choose a mutual fund that invests in the medical sector. This will give you some indication of what the mutual fund will invest in and you will usually feel more comfortable about your investment. This will allow you to choose only the sectors in which you believe the greatest growth potential lies. 

When an investor invests in a mutual fund that they do not understand, it usually leads to fear and uncertainty. Therefore, by choosing only the topics that you are familiar with, you will usually end up choosing a better performing mutual fund.

blog comments powered by Disqus
Scottrade