Funds Beginner: Five Questions to Ask Before Buying a Mutual Fund

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1.
Who decides exactly which securities a mutual fund owns?
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The fund manager. The fund manager chooses investments for you. While the manager may practice a certain style that's common at the fund company he or she works for, the manager is the one choosing the individual securities.
2.
Two mutual funds with the same returns _______ have the same risk level.
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May. Two funds with the same returns may or may not have the same risk level; it will depend on what they are investing in.
3.
If Fund A returns an average of 25% per year and Fund B earns 15% per year, _______.
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Fund A likely has a greater potential for loss. In general, the greater the return on investment, the greater the potential for loss. Although Fund A is a higher-returning fund, some investors might find it too volatile.
4.
What is the best way to get a feel for how a mutual fund manager invests?
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Check out its list of holdings and the sectors in which it invests. Consult the fund's portfolio and portfolio statistics to figure out how the manager invests. Compare a fund to a benchmark to see how competitive it has been.
5.
How can you gauge how competitive a mutual fund's returns are?
Choose wisely. There is only one correct answer.
Compare a fund's return with those of an appropriate benchmark. Analyzing returns in isolation does not provide a context in which to evaluate a fund's performance fairly. Instead, compare a fund to an index or a group of funds that buy the same types of securities.