Whether to avail tax benefits or otherwise, diversification is a key to get the best out of your savings. You can invest in mutual funds, bonds, real estate and others among a wide range of products for your savings. It is important to think long-term while picking the right mutual funds. If you are holding a savings account like a 401(k) or an IRA plan, then to invest in mutual funds with a balanced share of bonds and stocks makes for a smart fund strategy. Here are some tips that you can consider before you invest in mutual funds.

• Decide the type of mutual fund based on your risk tolerance: It is needless to say that all products are subject to market risks; you must assess your situation and your investment needs before you invest in mutual funds. There is a high possibility that mutual funds that offer high gains might lose money easily as compared to investments with mediocre returns.
• Identify the fund that meets your investment goal: You can invest in mutual funds that pay dividends if you intend to have a consistent annual income or buy long-term growth funds that make a few annual distributions if you intend to minimize the tax impact of your investments. At the same time, if you are a risk taker who wants to make a quick buck, you can invest in a high-yield bond or equity funds.
• Check the fund manager’s track record: Choose a fund manager who is experienced and highly skilled in handling an actively managed fund with a history of generating high returns by other funds under his care. However, the quality of the fund manager doesn’t matter much if you choose an indexed fund since it will mostly be passively handled.
• Pick the lowest expense ratio: There are several types of fees and expenses that you incur in holding your mutual funds. Typically, your fund manager charges 0.1% to 3% of your mutual fund value annually to manage the administrative and operating costs involved in their paperwork and working hours spent on managing an actively managed fund. Ensure that you find the lowest possible charges among all available options with the same objectives and a similar portfolio. The expense ratio of an actively managed fund is considerably higher compared to their passively handled counterparts, for example, the index mutual fund. However, ensure that your returns are also in sync with the charges you pay.
• Be aware of various types of brokerages: A brokerage paid for selling your funds is called a load fee. This commission is called with different names based on when and how they are charged. It is called as sales charge if it is charged at the time of investment or called deferred sales charge if it is charged at the time of redemption or exchange fees for those who want to modify their original investment in shares by selling, buying shares, or moving to another. Look out for funds that are advertised as no-load funds which may not be free and may charge you with some other fancy name.
• Identify the share class that suits your investment strategy: Typically, three classes of shares carrying different types of expenses are offered on mutual funds. Typically, Class A shares are more suitable for you only if you are planning to make a single investment and hold it for a long period. This will carry a frontend load fee with lower expense ratios and 12b-1 fees as compared to class B and C shares. Assess which share class is the most suitable for you that gives the best value for the chosen investment strategy.
• Buy at the right time to avoid additional taxes: All mutual fund companies require money to distribute capital gains and dividends to their shareholders. There will be taxes applicable to these distributions. So it is important to ensure that you don’t end up paying un-intended taxes by buying a mutual fund just before distribution. It is also a good option to check with the company for their distribution cycle so that you can make your purchases after the taxation is completed. December or earlier is considered to be a good time to make your distributions, especially if your investments are outside a tax-deferred account.
• Pick the right type of account based on your tax situation: If you are trying to take advantage of benefits offered by the tax-sheltered retirement accounts, then get an IRA or a 401(k). If you have an account that is going to be taxed, then you can try to save up on taxes by investing in tax-managed funds, exchange-traded funds, index funds, municipal bond funds, and stocks. Hold on to them for a longer period (at least more than one year).

Although there is a lot of risks involved in the trade, it is easy to invest in mutual funds and build wealth if you know these three things: where to buy, what kind to buy, and how much to invest. With this, be wary of the fees, turnover rate, investment holdings, and performance to get the best out of what you plan to get.