What to Watch Out for in a Mutual Fund
By: Source: AARP.org Date Posted: 2005-03-20 12:09:11
A good manager, good performance, and low fees are important features to look for when selecting a mutual fund. Be cautious, however, if your mutual fund has any of the characteristics listed below.
What You Should Know
Recent Changes
Find out if the fund you're considering is going through major changes like a restructuring or a change in managers. These changes can impact a fund's performance.
Rising Expenses
As a fund gets older and bigger, its expenses should begin to decrease. If expenses continue to rise, the fund may not be operating very efficiently. Determine why costs are so high.
High Turnover
Some funds buy and sell securities constantly. Other funds do not. Generally speaking, a fund that sells a large portion of its portfolio in any one year probably has high transaction costs, which means higher fees for you. To find out what percent of your fund's portfolio is sold each year, check the portfolio turnover rate on the Financial Highlights Table of the prospectus.
Closing
Sometimes a mutual fund can't find enough stocks and bonds to buy with the cash that investors send it. When this happens, the fund may close, meaning it won't accept any new customers until it has invested the cash it has on hand. A fund's closing could indicate that the fund's manager cares more about making wise investments for current clients than he or she does about attracting new clients. That's a good sign, if you're a current customer. However, if you're a prospective customer, don't try to jump on board right before a fund closes. A fund's performance usually falters before and after a closing. Wait until the fund reopens. Monitor its performance for a while and then consider buying.
A Final Caution
It's tempting to choose a fund just because you recognize its name or because it's advertised in your favorite magazine. Don't be fooled into thinking a familiar name means good performance. Research brand-named funds just as carefully as the funds whose names you don't recognize.
For More Information
The Alliance for Investor Education
You can test your knowledge about mutual funds on a Web site run by the Alliance for Investor Education. The site also features a mutual fund fee calculator and a "Guide to Understanding Mutual Funds."
URL: http://www.investoreducation.org
The Securities and Exchange Commission (SEC)
The SEC Web site offers a variety of useful information for investors. Under "Investor Education," look for online publications about mutual funds and Interactive Tools, including a Mutual Fund Cost Calculator that will help you compare the true dollar cost of mutual funds. Use the EDGAR Database (listed under "SEC Filings and Forms") to find and read a mutual fund's prospectus.
URL: http://www.sec.gov
The Investment Company Institute (ICI)
ICI is a trade organization for the mutual fund industry. The group publishes a host of information about mutual funds, including "Questions You Should Ask Before Investing in Mutual Funds."
URL: http://www.ici.org/funds/abt/index.html
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