When it comes to investing in stocks and bonds using mutual funds, it is important to analyze the funds carefully to find those that align with your investment goals. The U.S. Securities and Exchange Commission (SEC) requires mutual funds to disclose enough information for investors to understand the fund’s investment objectives, key risks, fees and expenses, and past performance. These are some important factors you should know before investing in a mutual fund.
Least Important Factors in Analyzing Mutual Funds
Short-Term Performance:
When explaining the significance of short-term performance, it is important to first emphasize that long-term performance can be an important factor in the analysis of mutual funds managed by active management teams. It can be a good sign if funds managed by active management teams have outperformed the market over five or ten years with the same management team.
However, the performance of funds managed by active management teams over shorter periods of less than three years is irrelevant. Investors should take seriously the warning stated in all mutual fund advertisements that past performance does not necessarily predict future results.
Net Asset Value:
The net asset value of a mutual fund is the total assets of the fund minus total liabilities. The net asset value represents the market value of the fund expressed in a per-share amount and is calculated once a day. The share price is the price at which investors can buy or sell units of the fund.
Although the net asset value influences the decision to invest in a particular fund from a price perspective, it is not an indicator of the quality or performance of that fund. A high net asset value or share price does not mean the fund is better, so the net asset value is not a good indicator for evaluating a mutual fund.
Manager Tenure for Index Funds:
If you are considering index funds designed to track the returns of a market index such as the S&P 500 or the Russell 2000, manager tenure is irrelevant. Because index funds follow a more passive investment style that does not require the ongoing involvement of the fund manager, manager tenure is not relevant.
Family of Funds:
A family of funds is all the different funds managed by a single investment company. Some investors feel secure holding their mutual fund investments within one family of funds because they consider that company financially more stable or may believe that the fund brand has a strong track record overall.
Investors should be aware that the bankruptcy of fund companies has been virtually non-existent. When building a portfolio of mutual funds, it is important to find funds that align with your investment goals rather than committing to a single family of funds.
Fund Analysis Strategies You Should Follow
Understanding the factors that should not be considered when analyzing mutual funds will help you focus on the factors that matter to you, including:
Investment Objective:
Funds generally seek to achieve capital growth or income or a combination of income and growth. You should look for funds that align with your investment objectives.
Investment Strategy:
The fund’s strategy is the approach that the fund management teams will use to make buy or sell decisions for securities to achieve their goal. You should assess how the fund fits into your portfolio based on its investment strategy according to your financial objectives and risk tolerance.
Risks:
Every
Investment strategies involve some risks. The level of risk that an investor is exposed to largely depends on the assets held, the diversification of their portfolio, and the general risks of the markets themselves.
Fees and Expenses:
Mutual funds transfer legal, accounting, and other fees to investors to cover the fund’s management expenses. Some funds charge fees when an investor buys or redeems shares. Fees and expenses can affect investor returns, so it is important to carefully review the fee and expense information in the fund’s prospectus.
Management Team:
The investment advisor and portfolio management team make investment decisions based on the fund’s investment objectives. The manager’s tenure is the most important thing to know when investing in mutual funds managed by active management teams. When analyzing the fund’s performance, it is crucial to ensure that the manager or management team has been managing the fund for the timeframe you are reviewing and has achieved success.
Index Funds as an Alternative to Mutual Funds
Many investors have chosen to invest in exchange-traded funds (ETFs). Like mutual funds, ETFs provide investors with a straightforward way to build a diversified portfolio.
ETFs offer key advantages over mutual funds, including lower operating costs than traditional open-end funds, the ability to trade instantly (instead of mutual funds that are bought and sold once daily), and tax efficiency.
Many factors that are important in analyzing mutual funds are also important in analyzing ETFs, including fees, expenses, investment strategy, and risks. Online brokers often provide tools to screen ETFs that can compare a few funds to help the investor find those that meet their needs.
Key Takeaways
Analyzing mutual funds is essential to match your investment strategy with the best funds. Knowing which factors are less important in the analysis can help you focus on the factors that matter to you. It may be tempting to track hot mutual funds with impressive short-term performance, but long-term performance (three years or more) is generally a better indicator to pay attention to.
Source: https://www.thebalancemoney.com/mutual-fund-analysis-10-things-to-analyze-and-3-to-ignore-2466458
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