How to Choose a Mutual Fund - Essay Example

An investor has to decide what percentage of available funds is to be allocated to each of the assets to be purchased.
This paper will discuss as to which mutual funds are to be purchased from the available funds of $95000 and what criteria are used to purchase the same.

Mutual Fund Purchase Decision

One of the funds to be purchased with the available funds is the High Dividend Equity Fund which tracks the performance of Morningstar Dividend Yield Focus Index.[1] This fund is relatively new and was launched in March 2011 however; one of the key reasons why this fund is picked is its low expense ratio. The overall expense ratio is 0.4% with no acquired fees and expenses. A low expense ratio is one of the key criteria to decide about purchasing a mutual fund though it is not the only criterion.  (Barker, 2011). Further, the overall holding of the funds is in sectors that are relatively stable and provide regular dividends. Since its inception, the fund has earned a total return of 4.39% whereas the index returned 4.52%. 50% of the funds will be used in the purchase of this fund.

Another fund to be purchased with the available funds is the MSCI BRIC Index Fund which tracks this index[2]. One of the key reasons to purchase this fund is its diversification across four of the highest-growing countries in the world.[3] One of the key aspects of this fund is the fact that it invests in emerging markets with a focus on Brazil, Russia, India, and the Chinese markets. The overall expense ratio is 0.69% whereas the fund has been able to offer a return of 18.84% against the index return of 19.26%. One of the key reasons for investing the rest of the 50% in this fund is that it has invested in the Chinese market extensively. Since China is the fastest-growing economy in the world with huge potential, therefore, the overall chances of growth are relatively higher in this market as compared to other developed markets like US and UK. The total size of the fund is over $1 billion US Dollars.

Conclusion

Picking funds is one of the key investment decisions an investor has to make to ensure that only those investments are picked that suit the overall risk appetite of the investor. Considering different criteria such as fund size, expense ratio as well as historical performance, and asset diversification, two funds have been picked. One of the funds is a dividend-based fund and is focused only on those stocks which provide stable dividends. Another fund is picked based on its investment strategy of investing in BRIC stocks to reap the higher returns offered by the stocks from these countries.