How to Select a No-Load Index Fund
- 1). Define your investment objectives by analyzing what you want your fund to accomplish for you. For example, do you want a fund that pays you monthly income? Or do you want a fund that pays no income but has a greater potential to go up in value? With many thousands of mutual funds to choose from, defining your investment objective will help you narrow the list down to a more manageable size.
- 2). Determine your risk tolerance. After you have selected what you want your mutual fund to do, you should decide how comfortable you are with the risks the fund takes. While many mutual funds have capital growth as an objective, they set out to achieve this goal in many different ways. For example, some funds invest only in relatively conservative, well-known companies, known as "blue chips" and the value of such a fund usually does not fluctuate in value very much. However, some growth mutual funds only invest in smaller, highly speculative companies and the value of these funds can vary wildly from day to day. Similarly, some income-generating funds invest only in guaranteed United States Treasury securities, while others invest in low-rated, speculative companies that may go bankrupt. You should honestly ascertain how much risk you are willing to take relative to the potential return of any fund you analyze.
- 3). Choose an index category that is appropriate for your portfolio. Funds with similar investment objectives and risk characteristics may still invest in vastly different securities, and you should only purchase funds that make sense in terms of your overall portfolio. For example, if you are selecting only one index fund for your account, you should consider a broadly diversified fund, such as one that invests in the S&P500 index. However, if you already have a well-diversified portfolio, then you may consider adding a more non-traditional index fund, such as one that invests overseas or in precious metals.
- 4). Compare expenses and fees. Just because a fund is "no-load" doesn't mean it is "no expense." Funds have internal expenses, such as manager fees, and these should be reflected in the fund's expense ratio. Additionally, some funds have mandatory holding periods or charge redemption fees and you should factor this into your analysis. All other things being equal, you should select an index fund with the lowest fees.
