The most common method of choosing a mutual fund is probably to follow the crowd. What do I mean? I mean that people will often look at the trend of mutual funds being selected, and do the same as others. These are usually the “hot funds”. Even though it may not seem like it, going from one hot fund, to the next, is one of the worst moves one can do.
Generally speaking, investors distribute their new investments to a few mutual funds, and even a even fewer number of mutual fund companies. Speaking from a factual stand point, investors, to date (not sure if my stats are 100% accurate though) have invested in the range of $400 billion and up, throughout 3000 or so mutual funds. Although, a third is invested within only 50 or so of the funds, and a half are invested in the hundred biggest funds.
There are some advantages of going after those leading the market. The bigger mutual fund companies and funds are able to lower the costs, bringing in more money managers. The only downside is that the most popular mutual fund this week, may not be the best one next week.
Going with a mutual fund which was extremely hot last week is probably not the best approach to take. It will not likely give you great returns. This doesn’t mean that you should turn your back to last weeks hot mutual fund, but it simply means that you should beware before jumping into anything.
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