Here are some tips to make your investment in mutual fund safe and profitable:

For their regular operations, the funds charge fees and expenses to the investors. As an investor, you have to bear the costs of advertising, research and fund manager’s fees. If the costs of funds are high, it should give better results than the low-cost funds. A small difference in costs over a period of time can become a big difference in returns. Use a mutual fund calculator to calculate how the costs of various mutual funds accumulate, reducing your returns.

According to the law, you have to pay capital gains tax if the fund sells any stock to make a profit which cannot be offset against a loss and distributes it to the shareholders. This holds true even if the performance of the fund has been poor. To minimize paying the tax, talk to the fund when it is about to distribute the profit. You can also find out the information from their websites.

Find out how long the fund has been in operation and the corpus of funds managed by it. New or small funds can yield excellent gains in the short-term. Since these funds invest in a few successful stocks, it can reflect in the fund’s performance. When these funds start growing and invest in more stocks, the impact of each stock on the fund’s performance lessens. This makes repeating the initial spectacular performance difficult. Take a look at how the fund has performed over a long time (minimum period of 5 years) and how it has handled the fluctuations in the stock market.

Though it is true that past performance of the fund need not determine the future, you can gauge how volatile the fund has been. High volatility funds carry high investment risk. If your aim is to invest money for your college education in a year time, do not choose these funds. They will not only fail to meet your needs but may also cause loss of capital. The prospectus and annual report for the fund will give you an idea of the fund’s volatility. If the fund has generated spectacular returns for a few years and then dismal returns for the next few years, then it is a highly volatile fund.

All mutual funds carry some amount of risk. Even the funds that invest in the bonds and other debt instruments that are low-risk still have to face the risk of change in interest rates. Funds generating higher returns are more likely to take risks that you may not be comfortable with and may not match your financial goals. E.g. fund that invests mainly in technology stocks or small company stocks take higher risk. If you are investing in the fund for a short-term goal like going on a vacation, these risky funds may not meet it. To decide on the best fund, plan out your long-term strategy and decide your appetite for risk.

Many changes can happen in the mutual fund industry. The old fund manager may leave or the strategy may leave. The fund can merge with other fund. Find out the reason behind this. Changes like these can affect the future performance of the fund.

Find out the services offered by the fund and the fees charged by it. These details are mentioned in the offer document. Certain funds offer toll-free telephone numbers, check-writing facilities and automatic investment programs. Find out the ease with which you can trade in shares of the fund. Determine if the fund charges you for trading in shares. The funds like international funds or small companies funds need extra research from experts and hence charge higher.