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How Can I Tell a Good Mutual Fund From a Bad One? Today there are over 5,000 different mutual funds. So it is no surprise that selecting one can often seem like a daunting task. If you are looking at a particular fund there are several steps that you can take to learn more about it and to help you determine whether it is a good fund relative to others with similar objectives. These steps include reviewing the following: Mutual Fund Rating Organization Reports Review a report on the specific fund you are interested in from one of the various mutual fund rating organizations such as Morningstar or Lipper. Most good libraries have at least one of these resources in their business reference section. These reports will show the historical returns of the fund over several different time periods, how the fund compares to similar ones and to the stock market in general, what the top holdings in the fund were, and applicable management fees and sales charges. These reports also include brief commentaries on the funds. Most of these reports also give each fund an overall rating. Five stars is the highest rating for Morningstar. While a high rating means that a fund is one of the best funds of its type in the opinion of that particular rating organization, it still may not be appropriate for you. Prospectus Review a fund's prospectus carefully. It will discuss the fund's investment objective(s), types of investments the fund may invest in, sales charges, management and other fees, and other important information. Beta Coefficient The beta will tell you how volatile a fund is versus the market in general. Normally, a fund with a lower beta than another fund will be less volatile. So in a down market it is likely to go down less than the fund with the higher beta. However, the opposite is true in an up market. The fund with the lower beta is likely to go up less than the fund with the higher beta. Conservative individuals who do not want to see a lot of fluctuation in their mutual fund are probably better off picking a fund with a lower beta other things the same. Magazines Many business related magazines such as BusinessWeek, Money, and Fortune publish annual fund review issues. These magazines are a good place to start. Is the fund you are interested in listed in the best funds, the laggards, or not at all? If it is not listed it may be because it has not been in existence long enough. Ratings Organizations Several mutual fund ratings organizations exist including Morningstar and Lipper. These ratings reflect how well the funds have done relative to their peer group of funds and other factors. This rating information is available through many brokers and is also typically available at your local library in the Reference section. Combine this information and it should give you a good idea of how a particular fund compares to others with similar investment objectives based on past performance, volatility, sales charges and management fees, and many other factors. Remember, it is always wise to read a fund's prospectus thoroughly and to consult a financial advisor before investing. |
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