Getting Started With Evaluating Mutual Fund Performance
When it comes to mutual fund investing, many people ask me how to evaluate the performance and quality of their mutual funds in their brokerage account, 401(k) IRAs, etc. Simply evaluating performance in terms of rates of return can be disappointing in our current environment; additionally, it doesn’t speak to an overall investment philosophy or guideline that you can refer to when times are tough. Therefore, when I help clients with their mutual fund investing, I use these four guidelines to help them decide how to move forward when building their investment portfolio:
Load Structure. When mutual funds first became popular in the 1980s, you had to go through a broker to purchase them. You paid the broker through a front or rear load on the mutual fund so that s/he would service the account and help you from time to time. Although there are many great fund families where you still pay a load, as well as many great brokers and planners whom you compensate by investing with them in a loaded fund, the do-it-yourselfers of the world don’t need to mess with loaded funds because there are plenty of no-load options that still provide great long-term performance. Therefore you need to verify exactly what you are paying, and decide what your “load philosophy” is going forward.
An easy way to do this is to simply look up your mutual fund using its’ ticker symbol at a site like Morningstar—in this example, I looked up AGTHX, American Growth Fund of America so you can see where to tell if the fund is loaded (you’ll see in the photo that it has a 5.75% front load—meaning of every $100 you invest, $5.75 goes mobile strike hack android to paying the person who sold you the fund).
Internal Fund Expenses. In addition to the load you might be paying, you’re also paying internal expenses that go toward the operation and management of the specific mutual fund. Without going into all of the different types of mutual funds, the general principle is that you tend to pay more for an active portfolio manager monitoring a mutual fund, and you tend to pay less for a fund with a passive investing strategy, such as an index fund. One type isn’t necessarily better than