When you buy mutual funds there are certain questions you are likely to have and certain things you need to know. We look at 10 things you need to know about mutual funds before investing.

1. What has the fund performance been? Looking at past returns is not an indication of future returns and should not be relied upon. However it is useful to know how the fund has been performing.
2. What are the fees and how are they calculated? All mutual funds charge a management fee which is a percentage of the value of the assets of the fund. This is usually one to two percent per annum. Other expenses relate to the administration of the fund. These form the management expense ratio (MER) of the fund. There may also be a sales commission charged on the purchase of the units and these are referred to as entry fees. These fees are usually paid to the seller of the investment and can be rebated.
3. Are there any penalties for early withdrawal? Some mutual funds will have a fee for withdrawal within a certain time of investment. It will depend on the type of fund and does not apply to all funds.
4. What are the risks associated with the fund? Risks cover such things as market risk, the performance of the managers, specific risks related to the type of fund chosen, tax risk and the consequences of insolvency. Remember the greater the risk the greater the expected rate of return.
5. Who are the managers involved in the running of the fund? You will want to know about the people involved in the fund and their experience. It is the people behind the fund who are responsible for the performance of the fund.
6. What is the strategy of the fund managers? Are the managers active or passive? An active manager trades while a passive manger may follow an index. Charges are likely to be higher for an active manager. Some managers use leverage (the use of borrowed money).
7. Can the investment be altered? If the fund manager wants to change certain elements of the fund the prospectus should cover how investors are notified and in what circumstances changes can be made.
8. How easy is it to get your money out? You will want to understand how you can make a withdrawal from the fund.
9. What is the minimum investment? Some funds will accept lump sums of $500, $1,000 or $5,000 while some will have higher entry requirements. Regular automatic transactions may be as little as $100 a month.
10. What are the tax implications? You should speak with your accountant to determine the consequences of tax on your investment.

The answers to these questions will be found in the prospectus. The prospectus lists all the information about a fund and is a legal requirement to be provided to an investor. In New Zealand, where mutual funds are known as Unit Trusts or Managed Funds, an Investment Statement gives a summary of the prospectus which is required to be made available on request. Study the prospectus with the things you need to know about mutual funds in mind.