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Common Mutual Fund Investing Mistakes

Investing in a good mutual fund isn't rocket science, but it isn't a cakewalk either. Here are the common mistakes many investors make when investing in a mutual fund.

Paying a load: In today's world of competitive mutual funds, paying a load is ludicrous. Practically anyone who pays a front or back-end load is being suckered into a mutual fund by someone who probably gets a kick back from selling the mutual fund. Paying a load is simply an unnecessary expense that directly decreases your returns. Only invest in no load mutual funds.

Not knowing what fees they are paying: While paying a load is the cardinal sin, many mutual fund investors are unsure of what fees they are paying in general. General expense fees and 12 b-1 fees can add up to be significant fees as well. You should pay attention to the total yearly expense fee you are paying. Never pay 2% or more, and it's best to keep it less than 1.5% (around 1% is average for a good fund).

Investing in hot mutual funds: Good mutual fund managers should beat the market over a 5-10 year time span. However, investing in last year's hot mutual funds is generally a recipe for disaster rather than a method of finding a solid mutual fund. First, a mutual fund that does well in any one year is likely due to the fact that the mutual fund's focus (or sector that it tends to invest in) likely did well. A foreign small cap fund that does really well compared to the S&P 500 in a given year is meaningless. Instead, you should compare how that foreign small cap fund has done compared to other foreign small cap funds over the past five years.

Furthermore, when a fund manager receives a large infusion of cash (due to performing well in the previous year), it will likely negatively affect his future performance. It is one thing to invest $1 billion well. It is a lot more difficult to then invest $5 billion effectively. The manager will need to take positions in more, larger companies, even if he doesn't particularly like them.

Investing in too many mutual funds: A mutual fund invests in over a hundred stocks generally. If you invest in a general stock fund, that mutual fund alone is enough diversification for your portfolio. If you invest in sector funds (such as foreign small cap or energy funds), then you will need to invest in mutual funds to achieve market diversification. However, there's no need to invest in three energy funds or four different small cap funds. Find the best fund in each sector you like and invest in that one.