Picking a mutual fund

April 11, 2003

Consider loads, expenses, and past performance.


Picking a mutual fund

So you've decided to invest in a value fund with that extra cash on hand. You have a few funds in mind that you've read about. Once you know what types of funds you're looking for, you'll still want to consider several other issues before making your final decision.

One of the more important issues is load vs no-load. "Load" refers to the sales charges levied by many mutual funds. The charges can range from less than 3 percent of your investment (low load) to 8.5 percent, deducted either at the time of purchase (a front-end load) or when you sell (a back-end load). Or a fund can impose a "level load," which is built into its annual expenses, and you pay as long as you hold the fund. Load and other information is available at www.morningstar.com .

For the most part, you'll do better with no-load funds. They sell shares directly to the public with no sales charges, sacrificing nothing in performance.

A similar concern is a fund's expenses. The higher they are, the higher the annual fees you'll pay. A fund's expense ratio tells you how much it spent for every $100 in the fund.

Past performance is another key issue. While a good track record doesn't guarantee a fund's future success, it's better than a crystal ball. You want a fund that has had a stellar career compared with others of its type. A long-term track record tells you the most, since it reflects the fund's performance in both down and up markets. If a fund hasn't been around for at least three years, it's still unproven.

For most funds, the manager is critical to performance—so make sure the person who molded the fund into a star is still on board. Check at www.morningstar.com , call the fund family, or check its Web site. If he or she has been replaced by someone new and inexperienced, you might want to steer clear, or at least get more information.

You should also consider a fund's beta factor. Beta measures a fund's volatility relative to the overall market. Since the beta of the market is 1, funds with lower betas are less volatile, while those with higher betas are more volatile.

After you've identified the right funds for you, make a habit of putting money into them regularly. Dollar-cost averaging is an excellent strategy; you make an initial investment in a fund, then add a fixed amount each month. In down markets, your fixed monthly investment will buy more shares; in up markets, it'll buy fewer. Over time, you'll have paid a lower-than-average share price. Even more important, you'll have become a regular investor whose nest egg almost certainly will have grown more rapidly than if you'd bought sporadically.

— Staff Editor Vicki F. Brentnall


Vicki Brentnall. Picking a mutual fund. Medical Economics 2003;7:59.