Mutual Fund: Which is the best?
February 16, 2009 by MOYMJennifer
Filed under Investing
Have you read Blink or have you at least heard of the “Theory of Thin-Slicing?” According to Malcolm Gladwell, “thin-slicing” is the power of thinking without thinking. In layman’s term, snap judgment. During exams, for instance, it’s believed that the first answer that pops into your mind is usually the right answer. Could this be applicable in choosing the best mutual fund, however? Could you pick the right one in a split-second?
Top mutual funds are those that are not easily affected by ups and downs of the stock market, and are therefore, inelastic. “Top” would mean the money invested will most probably multiply.
Picking Top Funds
Point 1: Stability and consistency are factors to consider.
Point 2: Pick one that has had a steady track record. Deciding solely based on current fund standing is inappropriate. Bear in mind, every fund has a down year or two.
Point 3: Consider the expenses. Fund managers are entitled to fees, called “loads.” These fees cover the administrative expenses as well as the commissions and sales charges. No wonder, a lot of advertisements for “no-load” funds are out. Be wary about such offers, though, for they may carry hidden charges.
Point 4: Dig deeply. Find out how the fund delivered its impressive performance. Shun the thought of picking funds that blatantly breaches their investment mandates, e.g. large-cap fund holding a predominantly mid-cap stock portfolio.
Avoid getting funds that bank on high-risk strategy or its bull-run. Select the “all-season” performers. You must therefore educate yourself on the difference between a bull and a bear market. Volatility is the best predictor of how a fund will hold up in a bear market.
Check out sector funds as well as income funds. Sector funds have potential for tremendous growth as they are commodities of stable demand, e.g. energy companies, transportation, electronics, communications, etc. Income funds are those that don’t experience capital appreciation all the time but are not as likely to depreciate. Stay away from the “here now, gone tomorrow” funds.
Point 5: Check the ratings. “Rating Companies.” Morningstar is the most popular as it bases its ratings on performances over the last five or ten years. But keep in mind past results don’t ensure future results.
Lipper Leader Fund Ratings, on the other hand, uses five criteria – consistent return, preservation, total return, tax efficiency, and expense. The catch is that investors should be registered to get the classified information that they offer.
Schwab’s One Source Select List is another. Ratings are presented in diagrams and tables. However, they offer no explanation as to how they derive their data.
Magazines such as Business Week also provide rating information.
Let me ask now: Can you pick the best mutual fund? Actually, there’s no yardstick to measure the best from the worst mutual fund. What may be the best for one person may not be best for another. Each has different concerns. The best fund is actually the fund that suits one’s needs and wants. The choice is yours and yours alone. With careful research and diligence you will be able to pick the fund that best matches your needs.
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