Investing with experienced mutual fund managers is a time-tested strategy. These industry veterans have established track records that enable an investor to more easily learn about the managers, and establish a comfort level with their strategies and credibility. Research providers, such as Morningstar, make the search for data even easier; but what about the rookies?

New funds are launched all the time, and fund managers with new ideas sometimes deliver impressive growth, right out of the box. How can you tell if a new fund will be a winner or a loser? How do you know if you should take a chance on a new fund? Read on to find out.

SEE: Will A New Fund Manager Cost You?

Look Before You Take a Chance
While investing in a new fund might seem like taking a shot in the dark and hoping for the best, first impressions can be deceiving. Although a specific fund might be new, it's possible that it is being run by an experienced fund manager with a long and distinguished track record. Likewise, the fund complex itself could have a strong history of launching successful new products. Nothing is certain, and even veteran managers can stumble, but there are many ways to research a new fund before you decide to add it to your portfolio.

Managers
Start by doing research about the fund manager. How long has the manager been in business? How much of that time was spent running a strategy that is similar to the new fund? Was the previous fund successful?

You'll also want to find out how long the manager has been with his or her current employer. If the manager has had a long tenure with the organization, what role did he or she play before taking over the fund? Has the manger been in the business long enough to have seen both bull and bear markets? Determining the answer to these questions will help you figure out whether an experienced manager is running the show, an experienced assistant manager is now taking the helm of his or her own fund, or if a true rookie is making a debut.

Fund Complexes
Next, thoroughly review information about the fund complex. Is the rookie fund the latest product from a reliable old fund complex? Does the organization have a long history with the type of strategy the new fund offers? Many firms specialize in small cap, growth, value, socially responsible and other strategies, and have strong track records of launching successful offerings. In many cases, a new fund is managed in a manner similar to an existing product.

When a new fund is similar to an existing strategy, the name of the new fund sometimes provides insight into this type of scenario. Names, such as Large Cap Growth I and Large Cap Growth II generally denote situations where strategies are similar. You'll want to know if the fund complex has a good track record of launching funds that last, and whether they have historically lowered fees as assets under management have risen.

The Fund
The fund itself is also a valuable source of information. To learn about the fund, read the prospectus and check the fund's track record - even if it's short. How did it fare against its benchmark in terms of returns, alpha, beta and turnover? Does the fund's history demonstrate a rigorous adherence to the stated investment strategy? Are the fees high or low when compared to similar, competing funds?

The Bottom Line
While time-tested strategies and tenured managers appeal to the risk-averse among us, the opportunity to take a chance on a rookie in the hope that you find the next all-star player can be a power draw. If you can resist the urge to take a chance, be sure to thoroughly research the fund before investing.

If you do all of the research that you can and still like what you see, it could be time to put down the money to invest in a few shares of the fund. Adding a rookie fund to your portfolio should, like all risky moves, be done in moderation. Put a small amount of your assets in the fund as part of a well-diversified portfolio. If the manger does well, you will enjoy the gains. If the manger doesn't do well, the bulk of your portfolio will not be exposed to the damage.

Related Articles
  1. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  2. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  3. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  4. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  5. Professionals

    Index or Target Dates in 401(k)s: Which is Better?

    A common question is whether or not plan participants should choose index or target date funds in a 401(k). The answer depends on different scenarios.
  6. Investing

    6 Reasons Why Every Investor Should Consider ETFs

    Once you understand the benefits of ETFs, you’ll see how they could be an exciting and smart way to help meet your financial goals. Here some key facts.
  7. Term

    What's an Investment Advisor?

    An investment or financial advisor makes investment recommendations and analyzes securities.
  8. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  9. Investing Basics

    Explaining the High-Water Mark

    A high-water mark ensures fund managers are not paid performance fees when they perform poorly.
  10. Investing Basics

    Explaining Front-End Load

    A front-end load is a commission or sales charge paid by the investor at the initial purchase of an investment.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  6. Historic Pricing

    A method for calculating the value of an asset using the last ...
RELATED FAQS
  1. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  2. What action is the SEC likely to take on 12b-1 fees?

    The Securities and Exchange Commission (SEC) may take action to impose greater regulation on how 12b-1 fees are used, or ... Read Full Answer >>
  3. What is considered a reasonable 12b-1 fee?

    A reasonable 12b-1 fee is generally considered to be 0.25% of the assets of the mutual fund. The maximum amount allowed for ... Read Full Answer >>
  4. What are some of the most common mutual funds that give exposure to the retail sector?

    There are a number of mutual funds that give exposure to the retail sector. Three of the most popular funds are the Fidelity ... Read Full Answer >>
  5. What is the 12b-1 fee meant to cover?

    A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>
  6. What are the most popular mutual funds that give exposure to the utilities sector?

    Some of the most popular mutual funds that provide exposure to the utilities sector include American Century Utilities, Prudential ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!