Before you put your capital in a mutual fund, you need to know more than simply whether it ranks high in mutual fund list. Although some of the reviews are undoubtedly good, using them as the only basis for picking the mutual fund to invest could turn to be a mistake. If you are keen on the statistics, you will note than top-performing mutual fund are specified over a short period of time meaning you could end as a victim of performance trap.
To choose a mutual fund that is not just popular and has a high chance of producing long-term results for your profile, then you need to more information than a just rating. Consider the below seven characteristics.
In every investment, there are factors within your control and other not. For instance, you cannot control the direction of a stock market. However, the expense ratio of mutual fund you choose to invest in is within your control.
Morningstar did an independent investment research in 2010 showing the impact of low expense in mutual fund performance. The result was low expenses and higher performance is correlated. In the investment category studied, the lowest cost profiles outperformed the highest cost profiles by a significant margin.
Strong fund management
Top mutual funds have a strong management team and a solid group of analysts. Also, those who are trading make sure the fund trades are well executed. The majority of the mutual funds reflect the performance of their managers. Therefore, before you put your money, learn as much as you can about the manager and find out how he or she will be changing the investment process or other factors that affected the fund in the past.
Consistent investment process
Know the cost and investment strategy of your mutual fund of choice. It’s actively managed, look at fund’s investment process. Ask yourself this questions. Is the investment process sustainable all year round? What makes this mutual fund unique from other funds?
Such queries will make you understand the investment process, its uniqueness and presumably why it’s better than other options available.
Strong parent company
Running a mutual fund is quite challenging. It requires more than just a skilled manager. Having a strong parent company means the fund conduct recruitment of talented support staff. A strong , ethical company sets the pace of its funds in terms of stewardship which Morningstar defined as , the manner in which the fund is run, the level in which the shareholder expect their interest to be received and protected from conflict of interest by the managing company.
Strong relative performance
When looking for a mutual funds, compare apples to apples. Do not compare the performance of government bonds and investment in large domestic stocks as the two are different in many ways. Instead look at the fund’s performance in the category of peer groups of funds. Assess how the fund is performing in 3, 5 and 10 years as history says a lot.
Size of the fund
You cannot afford to overlook the size of a mutual fund. You will notice that majority of funds starts on a high note but the performance taper off as more investors pour their money in. Size is also critical as some invest in small and mid-cap stock meaning they do not venture in large investment opportunities.
To address the growth system, some funds prefer to stay between small-cap funds and mid-cap funds. Other go outside their original investment and venture into diversification.
The issue of size is not a big concern to those mutual funds that invest in large-cap stocks.