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Running the Right Numbers on Your Mutual Funds


Mutual-fund companies clearly state that past performance is no guarantee of future returns. Nonetheless, financial advisors say long-term performance is the only thing most investors care about. Don't make the same mistake -- here are the numbers that really matter.

As a doctor, you’re trained to deal with all kinds of numbers: blood pressure and glucose levels, and LDL and HDL cholesterol, and zero in on those that are most relevant to your patient’s diagnosis and treatment. According to investment advisors, however, the chances are good that when you size up a mutual fund, you pay more attention to past performance figures than anything else. Wrong.

The mutual fund will even tell you that past performance is not an indicator of future results and then try to dazzle you with how well the fund has done over the past year or whatever other time frame makes the numbers look best. But as an investor, you should be more interested in how well the fund will do in the future than what it has done in the past. Over the long haul, say market analysts, a low-cost fund will have a big performance edge over one with a high expense ratio.

The Financial Industry Regulatory Authority (FINRA) has a handy mutual-fund cost calculator that will show you how fund costs can impact your investment returns.

Another benchmark to consider when choosing a fund is the fund’s turnover rate. A fund that churns it mix of investments often can generate higher trading costs, not to mention capital gains that you’ll probably owe taxes on. You should also ask about the level of risk that the fund takes on to see whether it matches up with your risk tolerance. And even though it may seem like a burdensome chore, read the fund’s prospectus, which is where you’ll find much of this information.

For basic and unbiased advice on mutual fund investing, check out the Securities and Exchange Commission’s Introduction to Mutual Funds. To get a more detailed look into your holdings, fund-ratings agency Morningstar.com offers various free and subscription-based tools that will analyze your mutual funds and compare their fees, turnover and performance to others in their categories.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice