Question: Do you have a checklist or guideline for investing in mutual funds?
Answer:
Yes we do. There are several areas we suggest reviewing, when considering a mutual fund for investment. In general, there are three main investment goals for mutual funds: growth through capital appreciation; funds that pay income, like dividend funds or bond funds, and protection of your initial investment. We suggest an investor look at their situation and risk tolerance to see where the fund investment may fit. Generally, if you are a young investor, we suggest a fund focused on capital appreciation.
One of the areas we examine is management tenure. If a manager is relatively new to the fund, its past performance and investment strategy may not accurately reflect its current management.
This, of course, brings us to fund philosophy and how consistent a fund is to achieving its goals. Funds can be prone to “style drift,” meaning it may change the way it invests or what investment vehicles are chosen. Managers may get away from their area of expertise when selecting investments, and this can affect the overall allocation in your portfolio. For example, if you select a domestic equity fund because it invests in U.S. companies, it would be considered a style drift if in two years 50% of the holdings were international companies. You may already have a specific amount of assets in your overall portfolio dedicated to international stocks, so such a style drift could overweight you in a certain sector.
Though past performance is not indicative of future returns, it is helpful to know the fund’s long-term performance record. Comparing long-term performance can indicate how a fund has performed through various market cycles. We feel that past performance can indicate if the fund’s investment philosophy has paid off in the past.
Another area for consideration is whether the fund is actively or passively managed. Actively managed funds have fund managers who have likely set criteria for the investments purchased within the fund, and monitor them regularly. Passively managed funds often track a sector or index. If you are interested in a passively managed fund, we suggest considering one with the lowest expense ratio. Expenses can eat away at your returns. Among passively managed funds tracking an index, they should all invest in the same basket of stocks at the same percentages, if they are tracking the index accurately. Choosing the fund with the lowest expense ratio can preserve your investment growth.
Overall, there are many considerations for investing in mutual funds. Comprehensive information on a fund is available in the fund’s prospectus. All mutual fund prospectuses are required to contain the same information, so comparison can be easily made. We also suggest looking at the research available on Morningstar.com and Yahoo Finance.
We believe you should Live Ready, and that includes understanding the underlying investments within your mutual funds. We feel you should monitor your investments, even if they are mutual funds with professional investment managers. If you have any questions regarding the funds you have chosen, you may contact one of our experts at 770-429-9166, or at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
