The Five Ingredients of a Solid Mutual Fund

July 4th, 2007 • Related • Filed Under • by admin

Investing in mutual funds has always been a bit easier than investing in single stocks. You know there’s much less risk because you’re not depending on a single company, and won’t have to worry about the inner-workings of just one business because you can instead rely on the fact that capitalism trends upward over time. You can look at all sorts of statistics about a mutual fund to figure out whether or not you should put your money in it rather than having to rely on business rumors and luck when picking out single stocks. Not all mutual funds are the same though, some are much better than others. Here are five key things to look at when picking a mutual fund to invest in.

Expense Ratio and Other Fees – The lower the expense ratio that the mutual fund has, the better. No one wants to pay a fee just to keep their investment on the books, so we should want to minimize the expense ratio as much as possible. Rates of return are important, but if the market’s down overall and losing money, you won’t want to be paying a huge fee to keep the mutual fund when it’s losing money. You’ll definitely want to watch out for other fees, such as advertising, legal fees, and the like.

Ten Year Return – Buy mutual funds with strong track records. How has the mutual fund performed compared to the S&P 500 for the last decade? You should be investing in funds that have at least a ten year track record of being the major indexes. Don’t put your money in a fund that hasn’t yet proven it self.

Morningstar Rating – The rating that Morningstar places in a fund is a great way to get a feel for the fund. Morningstar is ran by a group of serious investment analysis and have generally some very good ideas what makes for a good mutual fund. You won’t want to rely solely on their recommendations, but it’s a good place to start.

Turnover – If the money’s not invested through a tax-advantageous investment such as a 401k plan or a Roth IRA, you’ll definitely want to minimize turnover as much as possible. They can have nice returns sometimes, but you’ll get killed paying the capital gains taxes on it.

Investment Philosophy – How does the fund pick the investments that it buys into? Does the investment strategy make sense? Are they investing in a manner that I think will be profitable? Are they investing in a way that I would find morally acceptable? Read the fund’s prospectus to determine their investment strategy and see if it’s something that you’d be comfortable investing in.