How Should Investors Analyze Mutual Funds?

Mutual funds can be an essential part of your comprehensive investment strategy. However, not all mutual funds are the same. Some perform better than others in certain economic environments. There are mutual funds that are more conservative while some are more aggressive. Therefore, make sure to properly analyze the mutual funds you have in your portfolio or are thinking about adding. 

What are mutual funds? 

Mutual funds are financial vehicles that combine funds of investors with the objective of investing in various financial assets such as stocks and bonds. Investors can buy and sell shares of a mutual fund which represent proportional ownership of the mutual fund’s overall investment portfolio. The value of mutual fund shares rises and fall concurrently with the value of assets held in the mutual fund. 

The following are some tips to properly analyze mutual funds. 

Take investment style into consideration 

When looking to analyze a mutual fund you will need to first classify the investment style of the mutual fund manager. Some investment styles are more geared towards growth while others aim for value. 

Investment styles can vary in accordance with the size of companies they invest in which can vary from small-cap to mid-cap to large-cap. Also, there are passive investing styles which make minimal numbers of trades while active investing styles buy and sell often. 

Each investment style will have its own potential for growth and risk of loss that you will want to consider. 

Look at past performance 

Historical performance of a mutual fund should be a key indicator in your analysis of the mutual fund you are looking to potentially add to your investment portfolio. Compare the performance of the mutual fund you are considering with other mutual funds within its niche. For example, compare a fund focusing on mid-cap companies with other mid-cap funds. This will allow you to see if the fund you are looking at involves more risk than average. 

Also, be sure to look, not only at overall gains or losses, but examine the consistency of returns of the mutual fund over a longer period of time. More volatile funds may provide great returns one year that is well above the benchmark but in the next year end up with large losses. 

Consider fees charged by mutual funds 

An important aspect to consider is the fees that a mutual fund charges. Mutual funds that have a more active trading style will usually charge more fees. The costs of investing in a mutual fund are something worthy of thinking about since it does cut into your potential return on investment. 

That being said, simply because a mutual fund has higher fees does not make it unworthy of investing. Many times, mutual funds with higher fees will have a more promising trajectory for gains when looking at historical performance of the fund. 

Which mutual fund is best to invest in? 

Choosing the right mutual fund to add to your portfolio should not be a decision you make blindly. Do your research and look at the various aspects of each mutual fund as described above. Take into consideration the rest of your portfolio as well and make sure that adding the mutual fund will be a move towards achieving your financial objectives. 

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Paramount Wealth Management] and not necessarily those of Raymond James. 

Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 

Past performance may not be indicative of future results. 

Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.