The Best Mutual Funds All Share a Few Basic Advantages

Learn the basics on searching for the best funds. Getty Images

Ultimately the best mutual funds to choose are those that align with your investment objective and risk tolerance. However, there are common features that you should always look for when researching and analyzing mutual funds. This article will also show you how and where to find these qualities of the best funds.

It takes money to make money and mutual funds are no exception. The cost of managing the fund, which come directly out of the fund’s assets, is expressed as an expense ratio. For example is a particular fund has a return before expenses of 10.00% and the management cost (expense ratio) is 1.00%, the actual return you receive as an investor in the fund is 9.00%. Therefore the higher the expense ratio, the greater drag on the performance of the fund.

Here are some averages, by fund category, to look for when doing your research:

• Large-Cap Stock Funds: 1.25%
• Mid-Cap Stock Funds: 1.35%
• Small-Cap Stock Funds: 1.40%
• Foreign Stock Funds: 1.50%
• S&P 500 Index Funds: 0.15%
• Bond Funds: 0.90%

There are plenty of good funds in the investment universe with expense ratios below these average levels. Also, the best index funds consistently have the lowest expense ratios and no-load funds often have below-average expenses.

This is another aspect of keeping costs low (and performance potentially higher). A mutual fund load is a sales charge the investor pays when buying or selling shares of mutual funds. A no-load fund is a fund that does not charge a load, which can be either a commission (front-load) or a contingent deferred sales charge (CDSC or back-load).

Loads are intended to be a form of payment to stock brokers and other commission-based financial advisers for their services. Therefore, in general, any investor who is doing their own research, making their own investment decisions, and making their own purchases or sales of mutual fund shares should buy only no-load funds.

Past performance is no guarantee of future results but short-term performance is the farthest away from a guarantee possible. Even the best fund managers have at least one bad year out of three. But if they are behind the averages or benchmarks for 5-year and 10-year periods, there is something not working, to say the least, about their management style.

Also, a full market cycle is often more than 5 years. This is why it is important to analyze performance for the 5-year and 10-year returns of a mutual fund. You want to know how the fund did through both the ups and the downs of the market. For example, if there was no

Manager Tenure refers to the amount of time, usually measured in years, a mutual fund manager or management team has been managing a particular mutual fund.

In general, the longer the manager tenure the better. But the most important aspect to analyze is to match the tenure with the performance. If you find a fund with a good performance track record, you have no idea how the fund might continue its winning ways if it just hired a new portfolio manager. For example, if you find a mutual fund with a strong 5-year return but the manager has only been there for 1 year, the 5-year performance is almost meaningless.

Keep in mind that manager tenure is most important to know when investing in actively-managed mutual funds. This is where the manager is actually making decisions that impact performance, whereas an index fund manager only seeks to match the performance of a given benchmark. Therefore manager tenure is not a concern with passive investing .

The Turnover Ratio of a mutual fund is a measurement that expresses the percentage of a particular fund’s holdings that have been replaced (turned over) during the previous year. For example, if a mutual fund invests in 100 different stocks and 50 of them are replaced during one year, the turnover ratio would be 50%.

A low turnover ratio indicates a buy and hold strategy for actively-managed mutual funds but it is naturally inherent to passively-managed funds. such as index funds and Exchange Traded Funds (ETFs). In general, and all other things being equal, a fund with higher relative turnover will have higher trading costs (Expense Ratio ) and higher tax costs, than a fund with lower turnover. In summary, lower turnover generally translates into higher net returns .

What is a good turnover ratio? In general bond funds will have higher turnover than stock funds. For example, a turnover below 100% would be low and 250% would be considered average. Turnover rates to watch for in stock funds would be below 50%.

If you use analyze all of the mutual fund stats previously mentioned in this article, you will be well-equipped to find the best funds. But if you are the analytical type that likes to dig deeper into statistics and data points, you don’t have to be a math wizard to use statistical analysis in mutual fund research. All of the key quantitative measures have already been calculated. So your only knowledge or skill is to understand how to use these measures to choose the best mutual funds.

Statistical analysis of mutual funds is just what it sounds like—a means of studying the quantitative aspects of a fund to help the investor gain an understanding of past performance for a clue about future results. Yes, there is no guarantee of future results but investing is not about guarantees—it’s about taking calculated risk.

Mutual fund research can be made easier with a good online research tool. Whether you are a beginner or a pro and if you are looking to buy the best mutual funds, review an existing fund, compare and screen different funds or you are just trying to learn something new, these mutual fund research sites are among the best.

Morningstar : They may be best known for their star rating system. which is on a scale of one to five stars, that helps investors choose mutual funds. Morningstar also offers tools, such as software for professionals, and research information available to all levels of mutual fund investors online. Morningstar also extends their information and commentary to Exchange Traded Funds (ETFs) and Hedge Funds. Morningstar has both free and premium services for investors.

Lipper Leaders : A Thomson Reuters company, Lipper is a global leader in supplying mutual fund information, analytical tools, and commentary. This online fund research tool by Lipper is useful to both professional mutual fund advisors and individual investors. Lipper rates mutual funds compared to their peers and provides an instant measure against five metrics, called Leaders — total return, consistent return, preservation, expense, and tax efficiency.

Kiplinger Mutual Fund Finder : With this search and comparison tool from long-trusted financial resource, Kiplinger, investors can research a specific fund, find funds that match a specific search criteria, compare multiple funds and download and save fund data for personal analysis.

Good luck in your research and remember to keep things simple!

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.