Mutual Fund Selection Tips
It's very important when picking mutual finds that you first define your investment objective. Most investors are interested in preserving the capital they already have (and invest for income) or they want primarily to increase their capital (growth). Few people shoot for 100% income or 100% growth, but you should choose a fund with investment objectives that are your own.
Tips for Selecting the Best Mutual Fund
Identify several top-performing no-load funds that pursue your objective. Morningstar Mutual Funds is a great place to start your research and get the morningstar rating for the funds you are considering. www.morningstar.com
Analyze performance in-depth. Don't just glance at overall five or ten year returns. For stock funds, look for 10 years of annual gains that have consistently beaten the Standard & Poor's 500 stock index in up and down years. For bond funds, compare performance to an index that matches the maturity of your fund. Generally, it is best to stick with short-term and intermediate-term funds.
Opt for consistency. If two funds have similar returns but one's share price swings widely while the other's is relatively stable, go for the least volatile. If you have to suddenly sell your shares there's less risk that they will be significantly depressed.
Investigate the current portfolio manager. Is the person managing the fund responsible for the fabulous gains of the past 10 years? Or has the star performer moved on to manage another fund?
Think small. Mutual funds with more than $1 billion in assets have a harder time producing superior results because they must invest in larger, more lethargic companies.
Don't invest in new funds. Why? Because they don't have a track record.
Don't accept biased advice. Brokers and financial planners who recommend funds often receive a commission when you buy. Take their advice only if the funds they suggest meet the criteria of your investment objective and you have done your own research on the suggested fund.
Don't jump in and out of funds. Professional investment advisors know that for growth, they must be in the market at all times. For most people, market timing is a risky business and highly impractical.
What Kind of Mutual Fund is Right For You?
Selecting the mutual fund that is best for you hinges on five basic rules:
1. Diversify.
2. Analyze performance over a long period of time.
3. Seek funds with continuity of investment style.
4. Use your money fund wisely.
5. Recognize mistakes. If your fund is not performing well, find another fund with a better track record.
If you are young and have many years to retirement, you may be best served by a growth-oriented mutual fund. If you are nearing retirement, a more conservative growth and income fund may be appropriate. At retirement, many investors seek the safety of bond or income funds.
Load or No-Load funds?
No-load funds make the most sense for most people. Load funds charge upfront commissions or expensive liquidation fees. No-load funds have no commission at the time of purchase and can be liquidated without penalty. To date, no-load funds have performed as well as load funds, so there is no reason to accept the extra burden of a load fund.
