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Check Out the Facts before Jumping into Mutual FundsIf you thought for a moment, you will see an enormous growth in mutual fund industry in the United States in recent years. A fact sheet gives you a bounty of information about the fund. It helps you decide on a particular fund and how to tell an ethical mutual fund from a non ethical one. This article covers:
- What are the points that help you in pre-selecting the mutual funds?
- are the parameters that help you in comparing the performance of the mutual funds?
- What are the points to be analyzed while comparing the risk factors of various mutual funds?
If you thought for a moment, you will see an enormous growth in mutual fund industry in the United States in recent years. This is enticing more individuals to invest either directly or through retirement funds like 401(k) plans (a savings plan for retirement to be funded by the employees and employers in equal proportions. These funds are tax free till they are with drawn and also the contributions are deducted before tax). But come to think of it, for a number of innocent investors, the brochures are just the reminders of their investments. And the case is no different with fact sheets too. They elicit a quick check of their investment necessities, status or the like. In fact it needs to be regarded as a communication of better and more information that concerns the nature of investments the funds make.
The U.S. Securities and Exchange Commission (SEC) has some clause about the need for communicating facts by a fund to all its share holders.What is a Fact Sheet for Buying Mutual Funds
A fact sheet gives you a bounty of information about the fund. It helps you decide on a particular fund and how to tell an ethical mutual fund from a non ethical one. Given below are some important facts that you should know as an investor in Mutual Funds.How to Pre-Select a Mutual FundBefore you zero in for investment, make a short list of funds that are broadly doing well. For doing this assessing following points may help:- Try to match your financial profile to a fund's characteristics and risk or reward history. Your profile may not permit you to invest in high paying funds if they have a high risk element. Reading the funds' prospectus in detail will give an insight into their portfolio and investment pattern. It is obvious that high returns are almost always associated with risky investments. Any down turn of fortune can see you loosing your principle haplessly.
- Find out whether the fund's investment philosophy satisfies yours. If you have an inclination for social causes
or looking for a steady build up of principle without much risk, look for funds that are socially responsible and/or investing in government bonds and T-Bills.
Assess whether the fund's costs, fees and loads are too much or in line with your estimation.
You may not need a portfolio of more than 8-10 funds from different companies to sufficiently diversify your fund allocation objectives. This helps you average out and to a certain extent stabilize returns (especially when your objective is regular income). Select specific funds in your chosen categories to meet your needs.Ask Question to the CompanyThough claims of high past performance are not guaranteed to continue for the current year, asking a few pertinent questions may enlighten you about the company's strength or weakness to tide over crises. Also what worked for others need not work for you.Compare Fund PerformanceOne can not over emphasize the importance of comparing the performance of a fund critically. Compare
your fund with similar funds in the same class as you intend to invest. You have to do it for parameters like:- The total return you expect on your investment over a reasonable time period. This is a figure arrived at by subtracting costs of holding (includes loads, fees, brokerages and taxes etc.) from gross income from the invested amount.
- An overall ten years' performance of a fund is not an indication of its current performance. To know exactly whether the fund is consistent recently you have to compare the performances of each year. This reveals if the fund has had a stellar performance some time ago before wading out to a poor patch of late. Because one outstanding performance can average out a spate of subsequent poor shows.
- Check for ranking in the same class. You can not compare onions with oranges. Certain rankings are results of comparison across categories. But what you need is a comparison of your pick with its competitors to know where it stands.
- Sharpe
ratio is another vital parameter in your pursuit of a good mutual fund. You can calculate this figure by subtracting the returns a standard risk-free investment (such as a short period government bond or a T-Bill) would give you from the expected returns on your pick of the fund. You have to divide the remainder by the standard deviation*. The higher the ratio better is the fund. Simply put, if the ratio is positive, returns of a portfolio are out of some excellent investment & fund management and a negative figure shows excessive brinkmanship. In order for this to be positive, the expected return has to be always higher than the return on risk free investment. (* = a value of how spread out the data are in a given set, you can ask your advisor for a category specific standard deviation figure)
Continue to: Comparing the Cost of Different Funds
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