For most Americans, mutual funds are the centerpiece of their investment vehicles. If you have a 401(k) your mutual fund options may be limited, but for those of you who have an IRA, you’ll most likely have the option to choose any mutual fund that you want.
Choices are good, but too many mutual funds options leads to choice paralysis. You end up staring at a list of mutual funds wondering if you’ll pick the right one. Inevitably, a lot of investors will resort to looking at strictly the performance of the fund for the last 5 years and ignore everything else.
4 Factors to Consider when Selecting a Mutual Fund
Your mutual fund pick should be based on at least four factors: fees, fund management philosophy, experience, and performance.
1. What are the fees?
Every mutual fund will have a fee, so make sure you know what your costs are to invest in that fund. The lower a fund’s fees, the more of your return stays in your pocket. With the average mutual fund cost hovering around 1.2%, aim to find funds that are lower. With a little research, you can find funds that are much lower. Take these funds as an example:
2. What’s the fund’s management philosophy?
You can get a feel for a fund company’s management philosophy in relationship to their shareholders by looking on Morningstar’s grading system. This grading system will take into consideration the fees along with fund manager compensation, corporate culture, and board independence. This is important to consider when you’re looking at actively managed funds. If you’re considering index funds, this factor won’t affect you since index funds don’t have someone trying to beat out the stock market.
3. What’s the experience of the fund managers?According to a recent publication in Money Magazine, the typical fund manager will flip the entire portfolio over in less than a year. Look for experienced fund managers with a consistent investment strategy. You want someone who has experience with all market types and a long track record of sound investment decisions.
4. What is the fund’s performance history?
Finally, you still need to consider performance history when choosing a mutual fund. There’s no definite way to predict how a fund will perform, but past performance will help you decide if this fund has what it takes to keep up with other similar funds. In order to get an idea of how much a certain sector has performed, take a look at Morningstar’s Index Performance chart to get a good picture of historical returns for different sectors.
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Have you changed mutual funds lately? Did you take these factors into consideration?