We all know that we need to invest in mutual funds for our long term success whether your goals are for retirement, college, a second home, or any other objective. But, what should you look for in a good mutual fund? With their ever increasing popularity, there are so many choices of where to invest your money. What makes one mutual fund better than another?
When you are looking for a good mutual fund to invest in, you should look for these eight fundamental attributes:
Fundamental Attributes of Quality Mutual Funds
1. An outstanding long term return for the past 5, 10, and 20 years. We are investing for the long term, or you should be if you are considering mutual funds. So look at a fund’s long term record. Do not get wrapped up in this year’s or even last year’s rates of return. What has the mutual fund done over the past several years? Are they consistent?
2. Low expenses / Low turn over rate. A fund that buys and sells the stocks rapidly racks up brokerage commissions just like we would when we buy individual stocks. All of those $7 per trade commissions add up for us, just imagine selling millions of shares everyday. Low expenses mean that you keep more of the mutual funds profits in your pocket instead of paying salaries, commissions, administrative fees, etc.
3. A specific and published investment strategy. Mutual funds and their managers have a specific game plan when it comes to their investing style and strategy. They should always state what that plan is and stick to it. Be leery of funds that change styles or strategies without a good reason. The fund you invest in should fit into your overall diversification strategy. If the fund manager changes his investment style, it could throw your own diversification off.
4. No loads. In most cases, you should stick to no load mutual funds. Unless the mutual fund is simply outstanding, fees paid to the mutual fund company that runs the fund, either up front or in the end when you sell your shares, will just eat into your profits.
5. Fund managers with outstanding record. When you find a good mutual fund with an excellent 10 and 20 year historic returns, you want to make sure that the current fund managers are the ones who were actually responsible for those great returns and not just a new guy taking over where a great manager left off.
6. High ethical standards and reputation. In 2003, several mutual funds were charged in scandals involving late trading, market timing, and other unethical behavior. There is no excuse for a company to behave poorly, and I refuse to invest in one that does. I would even go so far as to transfer all of my investments away from an unethical company.
7. Not too big. Be careful of investing in popular mutual funds that manage a large pool of assets. The better a mutual fund performs in the short term usually brings the quasi-curse of more money to invest. As more investors pump money into mutual funds with high recent returns, it is hard for the fund’s managers to find bargains to invest in. It isn’t always something to totally sweat over, but it is definitely something to consider.
8. A member of Money Magazine’s Top 70 or Kiplinger’s Top 25 Mutual Funds. These funds have been pre-screened by financial professionals to meet certain investment criteria.
There are so many different mutual funds that investors can choose from now when deciding where to invest their hard-earned retirement, college, or other savings. According to Smart Money magazine and the Lipper database, there are 21,597 mutual funds to choose from to be exact.
So, just starting your selection process can be daunting, but it does not have to be. Using these fundamentals can make a great starting point which will quickly help you whittle your choices down to something very manageable. While there are no guarantees for success, using these eight characteristics and doing your own research about the mutual funds you choose will help to ensure that your money will be well taken care of in the future and allow you can sleep well at night.