Choosing Mutual Funds Involves Multiple Factors

In counseling investors looking at purchasing shares in a mutual fund, Jim Peterson, vice president at the Schwab Center for Investment Research said, "Look beyond performance. You want to know what's going to make a fund do well in the future and why it belongs in your portfolio."

According to Peterson, there are a number of factors to take into consideration starting with cost. A fund's annual expenses decrease the total return. It is a simple equation. High cost funds yield fewer profits and generally do not perform as well as low-expense funds.

If possible look for a fund that returns both good performance and minimal risk. Consistent performance is the sign of a well-managed fund.

Try to avoid portfolio overlap. Similar mutual funds will undoubtedly hold many of the same stocks. So called "copycat" funds bloat a portfolio and drag down its performance. Peterson counseled against holding more than three funds in any one asset class.

If a fund has recently changed managers, its historical performance record loses validity. You can't judge the fund unless you find out something about the new manager's record of performance.

Beware funds with a strategy that seems in drift. This may be characterized by bursts of trading or taking aggressive positions in a volatile marketplace. Big shifts in a fund's strategy should be taken as a red flag. In actively traded funds the investor is really putting their money behind the manager.

Good fund managers are honest with investors and provide timely information to them. They exhibit an investor friendly attitude and act as if their own money is on the line.