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Hints to Evaluating Funds... Page 2
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Trends in Net Assets: It’s a good idea to look for recent,
significant changes in net assets and examine how much the change is due to cash flow or
capital appreciation. Abnormal cash outflows may indicate something unfavorable in the
fund’s philosophy, fees, or performance. In contrast, catching the cash inflow wave
early can be quite profitable. Just be careful not to ride the inflow wave too long,
especially during an inflated market. Many of the little advantages, derived from positive
cash flow, (like having available cash to redeem shares) could very easily turn into
drawbacks when the fund isn’t as popular.
Turnover Rate: Low turnovers are better. Turnover rates generally
indicate the strategy or philosophy of the fund. For example, a fund with a turnover of
50% (the securities in the portfolio are kept about two years) tends to be more
buy-and-hold oriented. On the other hand, a fund with a 200% turnover (kept about six
months) tends to be more actively managed. Higher turnover rates normally accumulate more
transaction costs, which reduce total returns. Even if a high-turnover fund has the same
return as a low-turnover fund, there will usually be a greater tax obligation with the
high-turnover fund.
Useful Guidelines - General Info
- Historical returns do not guarantee comparable future performance.
- Manager experience is important, especially if that experience includes a significant
market decline.
- On average, long-time losers continue to be losers.
- Force yourself to read the Prospectus.
- Be careful of a ‘fund of funds’. It may have twice the normal expense ratio.
- Unlike a fund’s return, Sales Fees and Expenses are very predictable. Investors can
help themselves, in the long-run, by minimizing them.
Scrutinize funds with recent manager changes, especially if they sell off a majority of
the former manager’s picks.
Very few funds have good performance in both bull and bear markets. Most mutual funds
strive for above average returns in bull markets, others look for strong bear market
returns. Mutual fund investors should avoid searching for the "golden" fund and
pursue a well-diversified portfolio of funds.
Next: Read a Quote
Reprinted with permission of Find-a-Fund.com.
Mutual Fund information from Find-a-Fund: The most complete source of Mutual Fund
information.
Mutual Fund Calculators:
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• How do growth and income
funds compare?
• Which is better: a front
or back load?
• Which is better: load or
no load?
• How much do fees affect my
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