How to Chose the right Mutual Fund

Mutual funds are a great investment tool. There is an ocean full of mutual funds out there and it could be tough to pick out the right one.

It needs to be said that before considering investing in a mutual fund, one needs to have an objective and based on that objective pick out a mutual fund that fits that need. However once that is done, what other criteria needs to be considered? First of all upfront management fees should be reviewed. It is hard to outperform a benchmark and a light continuous out performance maybe overshadowed by the charges.

Second, look at the management team. Learn about them. How long have they been in business. Where have they worked before? How long have they been running this strategy individually and together as a team. You do not want a volatile management team.

Third, make sure that the team follow the discipline it has set out. Sometimes you may find that value funds somehow get more exposure to growth stocks and that means that the management team has potentially deviated from its style, which is not always good. Performance is obviously a very important criteria. Look at both short and long term performance numbers. Look at the type of volatility the fund has traditionally provided.

If you are a conservative investor and looking for an average 10% a year, there might be numerous funds that offered that traditionally but they might have gotten there in different ways. One could have done 100% in one year and down 45% the following, which will give you about a 10% return. Another one could have done 20% in year one and down about 8% the following and that would still provide you with about a 10% overall return. Which one fits your needs and risk tolerance best? When making this decision I always ask investors, do you prefer to turn 10 times at night or only once? The choice is yours.

Another criteria to consider is geographical location of the manager. Let’s say you are looking to invest in China market through a fund. One fund manager can be located in America, the manager of another fund is located in China. Though this is not a 100% proof but chances are the manager located in China, has more of a first hand access to new developments, trends and company information. This could lead to more alpha from the China based manager.

Look at the portfolio concentration in top 10 or 20 holdings. You can have a case where a fund with 100 stocks has a 50%+ in the top 10 or 20 holdings. This means that most of the performance will be derived from those top 10, 20 stocks and that might night be the type of diversification you may necessarily need. Grill manager on their investment time horizon.

Some may say that they suggest 3-5 years as an investment horizon, but then they go and invest in deep value stocks, which may take longer to appreciate, especially during certain economic conditions. Finally, personally I do not invest to outperform the index. I invest to grow my money. Hence, I look for funds that tend to provide the most positive results during numerous economic conditions. If the benchmark is down 50% and the fund is down 45%, which is 5% better, I am still 45% in the hole and that does take some time to recoup.

I hope you find this useful. Happy investing!