The best ways to choose mutual funds – Part 2

Hello and welcome back for Part 2 of our 2-part blog series on how to choose the best mutual fund. We hope that Part 1 was able to give you some valuable info and advice that you have already used in your efforts to choose mutual funds that are best for your financial lifestyle and, if you are ready for more, we are as well so let’s get started with Part 2. Enjoy.

When investing in mutual funds is always a good idea to do some type of qualitative analysis. Morningstar, a Chicago-based investment research firm that compiles and analyzes fund, stock and general market data, has a 5 tier scale that they use that gives their customers an idea about how a mutual fund is achieving. Using this a prospective mutual funds buyer can see some of the factors that have changed over time for a particular fund, information that will definitely give them better odds for success.

It is also important to weigh the impact that any fees will have on your overall gain when evaluating a possible mutual fund choice. For example, if one fund costs 1% but you have another that costs 0.1%, the former fund is going to have to make up 0.9% of the difference when picking stocks, something that is not easily overcome by many fund managers.

There are index funds that use market benchmarks to track how well they’re doing including Standard & Poor’s 500 index. These are generally cheaper than actively managed funds that, in order to outperform the index, need to rely heavily on management talent.

Many experts will advise that you look at fees towards the end of your evaluation and not get too hung up on them too early in the process. In some cases fund managers may subsidize or even waive fees. Some investors make the mistake of screening out mutual funds based on either their fees or expense ratios before they consider the type of investment or the style of the mutual fund that they are preparing to buy, a costly mistake in some cases.

It is also advisable to be cautious when investing in a mutual fund that has had a high turnover rate. This rate is the percentage of holdings in a portfolio that have changed over the past year. If you find that a mutual fund’s holdings have changed completely over the course of the year through buying and selling they would have a 100% turnover rate. On the other hand, some will have a turnover rate that is less than 10%. The type that you choose depends on the type of investor that you are in the amount of risk that you’re willing to take. Most mutual fund experts will tell you that it’s best to seek out funds that have a turnover rate of less than 40% because those with turnover rate of 50% or more are going to have a difficult time producing a return due to the increased costs of trading.

It’s very important that you also take a look at the fund manager of any fund that you’re considering. If you find one that has a manager that has been there for at least five years you will more than likely have found a mutual fund that is been handled with consistency and discipline. Without the information that it funds manager can give you it can be difficult to determine the performance that a specific mutual fund will have. For example, if you look at the 10 year returns of a specific fund but the current fund manager has only been there for a year it’s possible that they are following a completely different strategy and that the previous 10 years’ worth of results mean absolutely nothing.

Speaking of a fund managers strategy, the simple fact is that a sound fund will generally not abandon its investment strategy, even when the current market would dictate that the approach was unwise. During the bear market of 2008 for example financial companies were hit quite hard but funds designed to include financials in their mix did just fine. The same thing happened in 1999 when  internet stocks were all the rage. Some fund managers purchased these even though they had no earnings. Simply put, it is unwise to deviate from a proven strategy solely based on what the market happens to be doing any particular time.

While we realize that these 2 blogs aren’t the end-all and be-all to mutual funds, we believe that they both included some very valuable information that the typical investor can use to determine what mutual funds will be the best for their portfolio. Just like with any other investment it is always important to  you do your due diligence, research your mutual fund choices as well as you can before you purchase and purchase with your head, not with your gut. Best of luck and make sure to come back and visit us again sometime very soon. See you then.

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