In addition to past performance, you may want to consider the following elements of any mutual funds you're considering to help form a realistic perspective on a fund's past — and potential future — performance:
Portfolio characteristics. You'll want to review each fund's prospectus for the details on its investment objective, style, and risk profile to evaluate whether it is compatible with your goals. You may also want to check the most recent list of fund holdings.
Size of fund. You may want to avoid funds with assets of less than $50 million because of the relatively higher expenses associated with small funds, along with the possibility that a small fund may be more vulnerable to takeover. On the other hand, very large funds are sometimes less agile in part because they have so much money to invest.
Age of fund. There's a consensus that a fund should generally have proven its merit over a period of at least five to ten years, though there are some exceptions. Similarly, if strong returns depend on one or two outstanding years, with results trailing the market in other years, that's rarely a good sign.
Tenure of portfolio manager. You may want to find out how long the current manager has run the fund and how consistently the fund has met its objective — a few months, a few years, or a few decades — to get a sense of the fund's stability.
Cost of ownership. It's wise to compare funds' advisory fees, operating expenses, and marketing or 12(b)-1 costs, which together make up the fund's expense ratio, since these costs will have an impact on what you actually earn in the fund. You'll also want to consider any loads, or sales charges, and the fund's transaction fees. Expense ratios and loads are reported in the fund prospectus, but transaction fees may not appear as a separate figure.
Marc Lackritz
Apples to apples
To make an accurate comparison of the performances of different mutual funds, you'll want to look at funds that have similar objectives and make the same types of investments. For example, you learn more by comparing
small-cap stock
funds to each other than to a
bond fund
or even a
large-cap stock
fund. It also helps to compare performances over identical time periods.
Fund fees make a difference
If you invested $10,000 in a fund that earned a 9% annual return with total annual fees of 2.5%, you would have about $35,200 after 20 years. But if the fund had expenses of only 1%, you would have more than $46,600. That's a difference of $11,400.
Marc Lackritz