Contents
Mutual Fund Basics
Why Invest in Mutual Funds?
Mutual Fund Returns
Types of Mutual Funds
Mutual Fund Investment Holdings
Funds vs. ETFs, Stocks, and Bonds
How to Plan a Mutual Fund Portfolio
How to Research Mutual Funds
How to Buy Mutual Funds
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How to Research Mutual Funds
Once you’ve determined your risk tolerance and asset allocation, you’ll need to research which particular funds to buy. Though you may know the overall type of funds you need (such as bond funds or balanced funds), you need to research specific funds to identify those that have the particular traits you desire, such as management experience, expense ratios, and so on.
Mutual Fund Screeners
Mutual fund screeners are free web-based software applications that let you zero in on funds that meet the criteria you specify. To use a screener, you select the specific limits you deem acceptable for each of the fund’s criteria, such as total return, turnover rate, and so on. The fund screener at Yahoo!, available online at screen.yahoo.com/funds.html, is among the most popular and easy to use.
Screening Criteria
Below is a list of the most important mutual fund screening criteria, plus suggestions for the limits you should place on each (wherever applicable). Not all screeners include all of these criteria.
- Investment objective (or category): The type of fund, such as U.S. stock or emerging-market bond.
- Fund family: The fund company that offers the fund. You can narrow your choices to fund families you prefer, or to those offered by your company’s 401(k) plan, for instance.
- Management style: Active or passive.
- Management experience: Screen for funds whose managers have been at the helm for at least five years.
- Total return: Look for returns over the past five years that exceed the return of the most relevant index. For instance, if you’re screening stock funds, look for funds with an average annual total return that exceeds that of the S&P 500 index for the previous five years. If you can find an after tax or an after tax and expenses return screen, use those rather than the total return.
- Turnover rate: These range from the single digits all the way up to 100% and beyond. For taxable accounts, the lower the turnover, the better.
- Expenses: Look for no-load funds with expense ratios below 1.00% for domestic and 1.50% for international.
- Minimum initial investment: Most funds require you to buy at least $250 or so worth of shares at the outset; others have minimums of up to $100,000 or more. Adjust your initial investment requirements according to the amount you plan to invest in each fund.
- Redemption fees: Some funds charge investors a fee (usually 1–2%) for selling shares before a specific time period elapses. If there’s any chance that you’ll need the money you invest within one or two years, screen for funds with no redemption fees. If you’re sure you’re be holding your funds for longer than two years, don’t screen out funds with redemption feeds. .
Mutual Fund Investing Web Sites
Once you’ve used a fund screener to identify a few promising funds, it’s a good idea to research those specific funds in more detail by consulting an investing website, preferably one that specializes in mutual funds. These sites offer profiles of funds and fund families, plus insight into fund performance, fees, and much more. The two most popular sites are Morningstar (www.morningstar.com) and the mutual fund section on Yahoo! Finance (finance.yahoo.com/funds).
Fund Company Websites
Fund company websites are the most direct source for official documentation on specific funds, such as fund prospectuses, costs, holdings, and annual reports, which detail the fund’s performance over the previous year. Some fund company sites offer extras, such as interviews with managers, commentary on market events, and more. To find the website of a fund company that interests you, enter the fund company name into an online search engine.
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