What To Look For When Buying Mutual Funds

Nov.23, 2009 in Investments

Mutual funds are one of the investment options where you can invest your extra cash. As a mutual fund investor myself, I made a post on how to invest in mutual funds before to assist my readers interested in investing in mutual funds.

According to Kiyosaki, mutual funds are investment vehicles for a person to use as part of his or her financial plan to be secure or comfortable, not rich. Because of built-in management, mutual funds may be a better choice than stocks for new investors who lack the resources to pay a full-service broker or to create a diversified portfolio. Selecting mutual funds is not that different from selecting stocks, since you must first decide what types of funds you’re interested in, then evaluate their past and current performance.

Before sinking your hard-earned money into mutual funds, be sure to read its prospectus carefully. The prospectus is a financial document required by the Securities and Exchange Commission (SEC) that describes the fund to potential investors. You can request a copy from the mutual fund company itself—either by phone or through the company’s website—or from your broker.

The SEC requires that each prospectus contain certain information that makes it easier for you, the investor, to compare different funds. This information may be organized differently from one prospectus to another.

Here are some information on what you should look for a mutual fund:

Compare your financial objectives with the fund’s. As you read over a prospectus, compare your own financial objectives with those of the fund. For example, are you looking for aggressive growth (which could yield high returns over the long term, but with a lot of volatility in between) or value (which could yield lower returns over the long term, but with less volatility in the meantime)? The type of companies in which a stock mutual fund invests will also tell you whether the fund matches your investment goals. Are they small-cap companies carrying high risk but potentially high returns? Are they large-cap blue chip companies that offer a generally safe return on investment but no room for explosive growth? And what about risk? For example, are you willing to accept the risk involved in an international fund, which is vulnerable to fluctuating international currency rates?

Avoid funds with high fees and expenses. Closely examine the fees and expenses laid out in the prospectus. You want to minimize the amount you pay over and above your investment. Compare the operating expenses of any funds you’re researching and avoid those with high figures. Management fees range anywhere from 1 to 5 percent, which over time can significantly reduce capital gains. In some cases, you may be required to pay a load, or commission, when you buy or sell shares. You’ll recall that a front-end load is a commission charged at the time of purchase. A back-end load is charged if you sell your shares before a specific period has elapsed. A level load is a flat annual fee. In general, you’re better off looking for no-load funds. Don’t forget to read the fine print; footnotes may outline additional fees or expenses.

Examine the fund’s financial condition. A prospectus will present you with a condensed version of the fund’s financial condition. Required information includes current and historical data (up to ten years) of the fund’s total returns, as well as yields, turnover rate, and dividends, interest, or capital gains paid per share. A high turnover rate, meaning that the fund frequently sells investments and buys new ones, might mean increased commissions to brokers and other related costs, which could reduce the fund’s returns to you. Look for decreasing expense ratios over time; this indicates that expenses haven’t increased even if the size of the fund has.

Beware of funds with inexperienced managers. Check the fund manager’s credentials carefully, and see how long the manager has been in charge. Has this person been around for a while? How has the fund performed during this period? Think twice about investing in a fund whose manager has been in charge for less than five years—that person’s inexperience may cause your investment to underperform.

Request additional information. Prospectuses don’t always include all the financial information to which you’re entitled access. For example, the statement of additional information is an SEC-required document that offers in-depth detail about such things as the fund’s investment strategies, restrictions, past performance, and specific investments. The statement of additional information also mentions any legal actions pending against the fund. You should request a copy of this document if it’s not included in the prospectus.

Similarly, if you’re not sent copies of a fund’s quarterly and annual reports, request them. They outline the fund’s performance and may compare it to the performance of other funds over different periods of time—a valuable tool when you’re deciding whether to buy into a fund.

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17 Comments on “What To Look For When Buying Mutual Funds”

reyjr
November 23rd, 2009 at 6:01 pm
Interesting tips Tyrone! I have some money in mutual funds myself. The past year has been terrrible (with 3 r’s). But the market is slowly picking up again.

It’s actually great timing to buy mutual funds now, I think. They’re still relatively “low” value but is looking to continue growing in the next year or so. But hey, i’m no financial advisor so don’t take my word for it.

Thanks!

[Reply]
Tyrone Reply:
November 23rd, 2009 at 10:23 pm
I also have a minimum amount invested with Sun Life mutual fund. The rest are in UITFs which are still at a loss as of now. What kind of fund are you invested in? Bond, balanced, equity fund?

For locally invested equity funds, I think this is not the good time to buy since the Philippine stock market is quite high. Good timing is also the key in successful mutual fund investment. As usual, BUY LOW and SELL HIGH.

[Reply]
reyjr Reply:
November 23rd, 2009 at 11:36 pm
Equity.

Is it still low? I guess I’m basing my comments on the relative price from a few months back. It has picked up quite significantly from then, and looks poised to improve. But again my disclaimer. Hehe.

I think the trick is to not keep it static - as you say, to sell high and buy low. I guess it goes without saying, keep your agent’s phone number on hand. Haha.

[Reply]
Tyrone Reply:
November 23rd, 2009 at 11:55 pm
No, it’s not low. Instead, it’s high and the probability of gains is low while the probability of loss is high.

If you invested within the year, I guess you are better off right now since the stock market has picked up in the 3,000+ index already.

I guess one of the strategies that should be implemented in mutual fund investing is “cost averaging”. That is, an investor should regularly invest taking advantage of the highs and lows of the Net Asset Value Per Share (NAVPS) of a mutual fund.

reyjr Reply:
November 24th, 2009 at 12:03 am
yep, now we are on the same page. my investment was since last year. I did not bother to pull out the money during the recession - which was a mistake.

I agree with your strategy - actively taking advantage of highs and lows is a must for any mutual fund investor!
dlysen
November 23rd, 2009 at 11:43 pm
It’s not good to invest in recession period, its better to invest in something that money is within your control. Like buying properties instead intangible products.

[Reply]
Tyrone Reply:
November 23rd, 2009 at 11:50 pm
While I agree with you partly, real estate properties require a huge amount of investment. Mutual funds are for the small-time investors. It’s the starting point for most people to learn about investing and how they can grow their money.

Recession may not be a good time to invest for some but I think that for investors in their 20s, it is a very good time to invest while the economy is in recession. Why? They can take advantage of the low prices of undervalued and beaten stocks. They have a long time before retirement and they can ride the volatility of the stock market. In due time, when the economy starts to recover and stock prices starts to go up as well, they can quickly reap huge gains.

[Reply]
Tyrone
November 24th, 2009 at 12:11 am
@ Reyjr. Your strategy is correct. Had you pulled out your mutual fund investment during the height of recession last year (I guess it was September to December), you might have incurred a big loss back then. Since you held at your investment and the stock market has appreciated a lot since then, you just minimized your potential losses.

[Reply]
trader
November 24th, 2009 at 12:49 am
I think it’s hard to “buy low and sell high” when you’re invested in mutual funds because you still have to factor in their insane sales fees. If you’re sure that this is already the “market low” and that in 5 years you’re sure that it will be the “market high,” then maybe you can do just that (since the fees are usually waived in 5 years time).

Btw, I’m a professional trader, and even I can’t say that the market is already topish at 3000. The market can just go on further and may even hit 6000. Or it can go back to 1000. No one can tell. So, I agree, if you’re a long-term investor (which means you suck at timing) and you have a constant stream of cash, just do peso-cost averaging and invest a set amount in your mutual fund every month (do not miss!). Eventually it will work out. Do not strive to buy low or sell high because there’s no such thing as “low” or “high” in the market.

[Reply]
Tyrone Reply:
November 24th, 2009 at 1:09 pm
The sales fees are one of the reasons why I prefer UITFs over mutual funds. In UITFs, all the fees are already imputed in the Net Asset Value Per Unit (NAVPU) of the fund. However, I believe that mutual funds are more transparent in terms of disclosure of investments, etc.

[Reply]
cris
November 24th, 2009 at 9:28 am
I recently invested in mutual funds. Back then I was choosing between a balanced fund or equity.

Heck, for the “fun” of it, I placed an equal amount in both, hehehe, just to see to who will give the higher and more stable return.

[Reply]
Tyrone Reply:
November 24th, 2009 at 10:21 am
So what are your findings? Which fund gives the best return between the two? My guess would be equity funds. Am I right?

[Reply]
cris Reply:
November 24th, 2009 at 12:06 pm
They’re just a month old.
Maybe after a year or two, I could see some results.

[Reply]
Tim
November 26th, 2009 at 11:56 am
Would my broker disclose their fund managers’ professional profile? I’m also planning to invest in Sun Life.

[Reply]
Tyrone Reply:
November 26th, 2009 at 2:33 pm
Hi Tim, yes, your broker should disclose the fund manager’s professional profile. I am invested with Sun Life Mutual Fund and they sends me a nice-looking glossy booklet of the fund’s performance. The professional profile of fund’s managers are there.

[Reply]
noel c. villaceran
December 16th, 2009 at 8:30 am
dear tyrone,

I am an avid reader of your blog.
I try to invest in mutual fund through ‘PHILAMLIFE ABUNDANCE”
The story goes like this.The agent presented me the facts.The whole package of the contarct is 10 years. I will invest every year P50,000.00, in the first year the will charge my investment 60%,in the 2nd year 40% and 3rd year 30% and the remaining year 4th to 10 yrs is all waht i got, no charges at all.I feel so strange as i am neophyte in this investment is it really taht high the professional fee being ask throught the client when investing this product.Can you give some advice so i can pursue this investment as not to watse my hard earned money.

thank you,

You can reach me my email add:ncv1215@yahoo.com

[Reply]
Tyrone Reply:
December 16th, 2009 at 11:51 am
Hi Noel,

That’s not a “normal” mutual fund. Are you sure it’s a mutual fund? Or is it a variable life insurance? Did you fully understand the contract and asked the agent why the fees were that high? Variable life insurance is an insurance products that has an investment allocation. Thus it somehow mimics that of a mutual fund.

For instance, you availed of a variable life insurance that invests in equity funds. Part of your investment would be used to pay for the life insurance premium and another part of it would be invested in mutual fund (i.e. equity fund). This kind of investment acts more likely as a retirement fund.

I suspect that it is a variable life insurance and that the “fees” that agent is talking about are actually the deductions that will be invested as a premium in life insurance. You really need to ask further questions and ask the agent in detail about that kind of investment.

[Reply]

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