How to analyze a mutual fund

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 Q. There are so many mutual fund choices out there. I know I can compare performance, but which time frames should I look at and what else should I check out?

A. Performance is important, but you’re right. Performance isn’t the only metric you should consider when looking at mutual funds.

When you do look at performance, make sure you’re not only looking at the short-term.

“It is good to see what the return has been over 1, 3, 5 and 10 years,” said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown. “But, there are other things to look at to evaluate a mutual fund. If possible, see how the fund fared in difficult markets such as 2008/2009.”

D’Agostini said it’s also wise to investigate the fund’s fees and expenses. If the fees are higher, they must justify these fees by generating a higher return for you, otherwise they may eat too heavily into your returns.

Also look at the age and size of the fund.

“Newer funds could have excellent records as they could have fewer stocks, and if they are successful could show great returns, but may not be repeatable as the fund size grows,” she said.

A fund’s portfolio turnover rate, which shows how frequently they buy and sell securities, is also important to review.

“This could generate higher trading costs and capital gains taxes for you. Also, consider the volatility of the fund,” D’Agostini said. “Those with higher volatility will have higher investment risk. This should be matched up with the timeline for your investment.”

A more volatile fund could have significant investment risk, which you may not want if you have a short time frame for needing the money, she said. So you should consider the risk-adjusted return, or how much risk has the fund taken to achieve a particular return. The amount of risk should be considered against your goals and objectives.

D’Agostini said it’s also smart to see if there have been any recent changes in the fund’s operations.

“The manager of the fund could be a large reason for its success or lack thereof,” she said. “If there has been a recent switch in managers, the fund’s performance may not reflect its historic returns.”

She also likes to see how much of the manager’s own money is invested in the fund. If they “eat their own cooking,” they may be more aware of the risks in the fund.

When you compare funds to each other, it’s imperative that you compare like‐kind funds, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield. You know, “apples to apples.”

“Recently many people have been comparing S&P index funds to funds they may hold in their portfolio,” Gobo said. “While this may appear to be a tempting way to gauge your performance, it may not necessarily be a fair comparison if all of your funds are not U. S. domestic equities.”

Gobo offered these indicators to help you compare like‐kind funds:

Alpha: The measure of difference between the portfolio’s actual returns and its benchmark returns.

Beta: A measure of the portfolio’s sensitivity to market movements. The beta of the market is 1.00 by definition. So a beta of 1.10 shows that the portfolio has performed
10% better than its benchmark in up markets and 10% worse in down markets

Capture Ratios (up capture/down capture): These ratios indicate how well the portfolio manager did versus its benchmark during up and down markets, not
necessarily the benchmark listed on the prominent websites but the actual benchmark listed in the prospectus.

Max Drawdown: In a typical down period what is the potential loss you can expect to experience?

Finally, consider how to fund fits in with your overall portfolio diversification.

“The asset allocation of the portfolio is responsible for most of the return, so pay particular attention to stay true to the amount of risk, and the type of asset allocation that is right for you,” D’Agostini said. “If you maintain a balanced and diversified portfolio, you are more likely to achieve your goals.”

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This story was first posted in February 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.