Mutual Fund Evaluation

If you are like most people who want to invest their money, yet don't have the time or inclination to study the financial statements, ratios, or reports associated with a certain company whose stock or bonds you may be interested in, you might want to consider purchasing mutual funds.

Mutual funds are, in a nutshell, groups of investments (such as stocks or bonds) purchased and professionally managed by investment experts. The fund gives you diversification, meaning it owns many stocks/bonds, so all of your eggs aren't in one basket (such as having all of your investment dollars in Google - not a bad stock, yet you don't want to own just Google).
 
The question is, because there are several thousand mutual funds out there, how do folks go about choosing which funds are right for their portfolios?

A good place to start is on Morningstar's website. Click on the Funds tab and you'll find all sorts of commentary about various fund families, such as Vanguard or Fidelity. You can also go to the drop down box on the left side of the page and click on the fund family you are interested in learning about. This will take you to all of the funds this family offers, and using the links, you can compare their stats. Here's where you might begin:

1. What is the fund's rating? Morningstar gives Star ratings, with five stars being the best.

2. What is the minimum investment to get into the fund? Minimums can range from no minimum all the way up to six figures.

3. Is there a load for the fund, meaning is there a percentage charged in order to get into the fund, or out of it? I prefer no load funds - no percentage ever.

4. What is the expense ratio, which is the percentage of the fund's total assets that is used to cover expenses associated with the operation of the fund?

5. What is the fund's objective? Are they investing for income, meaning they'll provide income via bonds or preferred stock, for instance, or are they investing for growth, which is not going to yield much income, yet is targeted to provide long term capital appreciation. Or is it a balanced fund, which will do some of both. Be mindful of what you need in order to reach your goals, whether they are short-term or long-term. Fund objective is very important.

6. What type of fund is it? Foreign or global? Socially Responsible? Aggressive Growth? Sector (a specific industry)? Bond? Money Market? REIT (Real Estate Trust)? There are many more types of funds, each with their own unique objective.

7. What type of securities does the fund own? Are they in line with your comfort zone?

8. How many industries does the fund's portfolio include? Are its industry holdings in line with your comfort zone?

9. What is the fund manager's tenure - how long has the manager been with the fund?

10. What is the fund's performance over the past 1, 3, 5, 10 years? How does its performance compare to other funds in its category? To its benchmark? (S&P 500, Russell 2000, MSCI EAFE...)

11. What are the experts saying about this fund?

Note: Loads and high expense ratios can significantly reduce returns over time. I always recommend that folks look for funds that have no loads (there are plenty of top performers out there), and low expense ratios.

I hope you find these ideas helpful when you begin your research process for investing in mutual funds. There are many sources out there that you can use to evaluate mutual funds of your choosing. Use them wisely and be mindful of what your investing needs are. Avoid emotional investing. Use solid data to back up your strategy.

In your corner. Tina Anders