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What to Look for When Selecting Mutual Funds

What to Look For
While many people look to past performance in selecting a mutual fund, it should be the last thing on your list. Past performance is a poor predictor for future performance. The most important thing to watch for is the cost of the fund to you, since this will directly affect the returns you get. Below are the major items to investigate when selecting a fund.

Mutual Fund Costs

  • Sales Charge (some funds), includes:
    Front End Loads
    Back End Loads
    Level Loads (12b1 fees, etc.)
  • Ongoing costs (all funds)

Types of Stock Funds

  • Growth Funds – Seek long term capital appreciation
  • Value – Companies that are unpopular and beaten down in price
  • Equity Income – Seek for income
  • Broad Base Specialties
  • Concentrated Specialty Funds

Structural Characteristics

  • Size - $50 million or bigger to keep ER low, but not higher than $10, else it will act like an index fund
  • Age of Fund – To show that they have survived past bear markets
  • Tenure of Portfolio Manager – How long has individual or team been managing this fund

Portfolio Characteristics

  • Cash Position – Should be 5~7%. If higher, the manager is trying to time the market
  • Portfolio Concentration – Well diversified. Top 10 assets should be less than 15% of the total holdings
  • Market Capitalization – Size of companies in holding
  • Portfolio Turnover – Average is 100%. The higher the turnover, the more taxes you will be paying. This is important for investments outside of taxshelters (IRA, etc.)

Sources for this Information
Prospectus and Annual Report
Morningstar Mutual Fund service

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