How To Pick A Good Mutual Fund
If mutual fund investing is your thing, then you probably already have a few tricks up your sleeve for finding the good ones. But every savvy investor knows that you can never have too much of a good thing, especially when you know that up to 80% of mutual funds perform well below the average return on the stock market. Here are a few tips for finding the right mutual fund to invest in.
- Past Performance. The past performance of a fund should be considered when determining which fund will do okay in the future and which ones you should avoid, but only in the context of a complete analysis and not as a sole indicator of what a fund is likely to do. Why does past performance not indicate future performance? Think about past trends like the dot com bubble and the housing market. Just because something is hot today doesn’t mean it’ll stay hot in the future.
Cost. Mutual funds tend to buck the trend when it comes to cost vs. performance. Why? Because it appears that the cheaper a fund is to carry in terms of overall expenses, the better chance it has to do well in the marketplace. Morningstar conducted a study that grouped mutual funds into five categories based on the amount of expense the manager charged to manage the fund. According to the results of the study, the funds in the cheapest categories fared much better than those in the more expensive categories. But here’s something else to consider. Most of the cheaper funds were also larger. Since small funds have fewer shareholders, oftentimes the cost to carry the fund was higher and they often performed poorly in the marketplace.
Good Fund Managers. It’s no secret that a mutual fund will only be as good as the manager at its helm. So, when looking for mutual funds to invest in, take a long hard look at the fund manager. Pick a fund manager with years of experience. Look at his or her track record and choose the one who has a proven record of success. And finally, look for a consistent management style.
Well Established Funds. When looking to invest in a fund, pick one that’s been around awhile. This goes back to past performance, but the truth is, if a fund has done badly since its inception, odds are it won’t be around for long.
Fund Turnover. You should look for mutual funds that don’t have a high turnover rate, meaning that the manager isn’t buying and selling the underlying instruments a lot as this may be indicative of an inexperienced manager and can increase a fund’s expenses.
Look At The Top Holdings. This is an especially important metric you can use to ensure that the manager is keeping with the fund’s stated objective. For example, does a large cap fund hold stocks in large, well-established companies you know? Are there foreign investments in a domestic fund? Also, make sure that the fund is well diversified and that the top holdings don’t occupy too much of the fund’s assets as this might make the fund more vulnerable to market changes.
Last but not least, perform a gut check. After all of the analysis and review, you should have a pretty good take on what the fund is all about and whether or not it jives with your needs. If you have any passing doubt whatsoever about a mutual fund, it’s better to pass and find a new one rather than sink your money into a sinking ship.