Fund Basics: Tips for the New Fund Owner
What paperwork to keep, how to track your investments and when to sell.
Funds offer plenty of benefits to busy investors. Here's what you need to know after you add them to your portfolio.
After you buy mutual funds, your mailbox will be flooded with even more paperwork. For each fund you own, you'll receive semiannual and annual reports, newsletters from fund companies, updates from fund managers and tax forms. Actually, you can toss most of what you receive.
Here's a list of investment-related paperwork you need to hang on to permanently:
All your income-tax returns. But you only need to keep supporting tax documents — including 1099s and other investment and tax information — for three years after you file. After three years, you can be audited only if you've underreported your income by 20% of more or have committed fraud.
Records of all retirement-plan contributions, distributions, conversions and rollovers.
Records of the purchase of securities you haven't sold yet, regardless of whether you bought them or received them as gifts. Keep these records for three years after you sell the securities.
Track your investments
Consider setting up an online portfolio tracker, or look for personal finance software that includes one of these handy tools.
At the very least you'll want to record the date you purchased the shares, the number of shares you bought and what you paid per share. This information will be critical when you decide to sell (see Hang onto your profits).
Even though you have access to online quotes, avoid obsessing over daily price swings.
Reassess your plan annually to make sure your returns are keeping pace with expectations. Also make sure that hot gains in one fund or lagging returns in another have not thrown your portfolio out of whack.
Know when to sell
But if your fund trails other similar funds for two or three years, it's probably time to consider moving on.
Other possible reasons to sell include:
A new manager. Look at the newcomer's background. Maybe he or she has managed a fund before and is worth a chance. But remember, when a fund changes managers, its track record goes out the window.
QUIZ: Test Your Investing IQ
Too many assets. Funds that invest in small companies have a way of losing steam as they grow larger -- certainly when they bloat to $2 billion or $3 billion in assets. As money pours in, be prepared to look for a similar fund with a smaller asset base.