19 May How to pick a mutual fund
Q. I want to start saving in a mutual fund, but I have no idea how to choose one. I have a 401(k) plan that’s split between large-cap stocks, small-cap stocks and international, but those were easy to pick because there were not a lot of options.
A. Kudos to you for being a saver and for seeking guidance on how to select an appropriate vehicle.
There are three important factors to help guide your investment selection, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.
He offered the following questions you should ask yourself:
1) What is your overall investment objective? Are you looking for growth or is income more important?
2) What is your time horizon? Will these dollars be long-term investments or could they be needed in the near term?
3) What is your risk tolerance? How do you react to the ups/downs of the financial markets?
One other factor to consider, McCarthy said, is whether you are saving into a qualified or tax-deferred or a non-qualified account. He said this is important because you can’t control your tax consequences when investing in mutual funds.
“Some mutual funds are more tax-friendly and therefore better suited for non-qualified accounts,” he said.
In a non-qualified account, McCarthy said you should look for mutual funds with low turnover — the percentage of the fund’s holdings that have changed in last year.
“Low turnover generally leads to lower taxable distributions from the mutual fund,” he said. “If you will be saving in a qualified account — IRA, Roth, etc. — this is less important as all mutual fund distributions are tax-deferred inside the qualified account.”
Brian Power, a certified financial planner with Gateway Advisory in Westfield, said online mutual fund screeners are a good option to help you find and choose good funds. You can find many free ones with a quick search.
The screeners are simply databases of information about individual mutual funds, Power said.
“With some digging, you can answer, at a minimum, at least three important questions about a mutual fund: What’s the long-term track record? What is the fund’s rank within its category? What are the fund’s expenses?” he said.
Most screeners work the same way and allow you to organize the information to suit you, Power said. Screeners allow you to:
• Create lists of mutual funds based on returns.
• Compare specific funds.
• Review pages of graphs and stats for each fund.
• Set up your own portfolio page.
Power said it’s important, if you do decide to use a mutual fund screener, that you have an understanding of which criteria of a mutual fund is important to you.
Among the questions you’ll need to ask yourself are if you want a stock fund or bond fund, U.S. companies or international companies or both, large companies, small companies or in a companies in a specific sector, he said.
Once you know which direction you’re heading, Power said you should check for certain criteria on the funds you’re considering: portfolio manager tenure (3-, 5-, and 10-year track records), how has the fund done against its peers, and how has the fund done against an apples-to-apples benchmark (e.g. S&P 500).
“If these criteria sound foreign to you, I would recommend reading a layman’s term book about investing in mutual funds,” Power said, noting that “Investing for Dummies” has a whole chapter on mastering mutual fund investing.
McCarthy said you may want to take a look at Morningstar.com, an independent investment research firm that ranks mutual funds on a proprietary scale.
“They offer a free service that includes a mutual fund screening tool, as well as a paid premium service that will provide more in-depth analysis,” he said.
After you set up an account, simply go to the Funds tab and look for the Basic Fund Screener.
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This story was first posted in May 2015.NJMoneyHelp.com 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.