A Few Quick Tips On Mutual Funds

Posted By Paul

I found a great web page resource for mutual funds that I thought people would find useful. It's:

http://www.morningstar.com/

It lets you look up some great info on a mutual fund for free.

Here are a few key bits of info they provide that I find useful when evaluating a fund:

Front Load %
Deferred Load %

If you don't know what those are, the basic idea is that the front end load is a percentage that is deducted as a fee when you buy the fund (if you invest $1000 into a fund that has a 5% front end load, then $50 comes off the top and $950 actually gets invested). The deferred load is the same idea only it comes out when you sell the investment.

What do I look for? I look for funds that have no loads. There are lots of funds out there that don't charge loads and I have yet to come up with a compelling reason to pay them.

Expense Ratio %

The expense ratio is the percentage of the funds assets that go to administrative fees. What should you look for? Look for funds that have low expense ratios. What should you consider too high? Well I'd look very carefully at any fund that has an expense ratio that is greater than 1%. If the expense ratio is high it better be performing much better than similar funds otherwise I see no point to paying the added expense.

Morningstar Rating

This is how much Morningstar likes the fund. The best rating is 5 stars. Even though Morningstar is not necessarily the final word on funds, I'd look closely at funds that Morningstar doesn't at least rate at 3 stars (they have a detailed description of how they arrive at their rating on their page).

Performance Graph

I really like the graph because it shows the performance of the fund vs. the category of funds in general. If the fund consistently performance below its category I view that as a sign that it isn't a very good fund.

Morningstar Risk

This is just Morningstar's characterization of how risky the fund is (on their page they have the full description of how they determine their risk rating so I won't repeat it here). Looking at this field gives you a quick way to determine if a fund meets your risk tolerance.

When I'm evaluating a fund one of the first things I do is go to Morningstar and see how it looks. I can quickly get an idea on the loads and expenses for the fund, as well as its performance and risk. I can get all of the info I need to make a first glance judgement on a fund on a single page for free!