How to Evaulate a Mutual Fund

Post on: 20 Июнь, 2015 No Comment

T here are more than 15,000 mutual funds to choose from! Knowing how to wade through this sea of choices can cause the best of us to throw up our hands in despair. The reality is, however, that evaluating a mutual fund is really quite simple. So if you have 60 seconds to spare, heres how you can quickly evaluate a mutual fund.

Look up the fund: Go to Morningstar and enter the funds ticker symbol in the quote box at the top left. Press enter. This will take you to the Snapshot of the fund, which contains most of the information well need for our evaluation. (Running total: 10 seconds ).

Fund availability: The first item of business is to make sure the fund is still open to new investors. Funds close to new investors when the amount of money in the fund becomes too large to manage effectively given the funds investment objectives. In the funds Snapshot, look for the Status label, which will tell you if the fund is open or closed. (Running total: 15 seconds ).
No-load funds only: Next, make sure the fund doesnt charge front-end or back-end fees called loads. With so many excellent no-load funds, there is simply no good reason to pay a sales charge. What you need to look at is the Load on the Morningstar Snapshot. No load funds will show none. (Running total: 25 seconds ).
Expense ratio: Ive said it before, and Ill say it againexpenses are one of the single most important factors in picking a fund. Thats why I avoid funds with sales charges, and why I seek funds with low expense ratios. My rule of thumb is not to pay more than 1% for actively managed funds and no more than 0.50% for index funds. Most U.S. stock index funds are considerably less, some around 0.10%. Youll find the funds expense ratio at the top of the snapshot. For more on fund costs, check out How to Find The Hidden Cost of Mutual Funds (Running total: 32 seconds ).
The style box: Before picking a fund, you should know what asset class you want to add to your portfolio. Are you looking for a large cap growth fund, for example, or a small cap value fund? You can read more about asset allocation in a series Ive been writing. Scroll down from the top of the Snapshot and youll find the Morningstar Style Box. This will quickly tell you the market capitalization of the fund and whether its investments are value, core or growth. (Running total: 40 seconds ).

Past performance: Much has been said about not relying too heavily on past performance. The truth is, much of our investing decisions are made on past performance, but with the recognition that we dont know what the future holds. All of that is why, in my opinion, index funds should represent the core investments for must of us. That said, I always look at the 3, 5 and 10 year performance statistics of a fund as compared to its comparable index. The quick and easy way to get an initial assessment of risk adjusted performance is the Morningstar star rating. However, dont rely just on the star rating you see on the Snapshot. Instead, click on the performance link just below the star rating. This link brings you to a more detailed listing of the funds performance, including comparisons to the relevant index, for 3, 5 and 10 years. I look for funds with three stars or better. Again, a more detailed analysis of a funds risk adjusted performance can be made, but the star rating is a good, simple place to start. (Running Total: 48 seconds ).

Fund management: Particularly for actively managed funds, you want to see that the funds managers have been at the helm for a number of years. Theres no magic number here, but I like to see that a funds top management has been at the fund at least 5 years. Otherwise, the great performance the fund has enjoyed may be due to personnel who have since left the fund. Hitting the back button to return to the Snapshot will show you this information, including the name(s) of the managers and their start dates. (Running Total: 60 seconds ).

Is there more to evaluate before actually buying a fund? Sure, but this initial assessment will go a long way to narrowing down the many options. And 9 times out of 10, this quick evaluation identifies the fund(s) I actually end up buying.