Mutual Fund Accounts - Mutual Fund Comparisons



You should keep three things in mind when making comparisons among different mutual funds:

  1. Client objectives
  2. Suitable fund choices
  3. Individual fund features

Start with the client's objectives: What is the client's time frame and what are his or her expectations concerning return, risk tolerance, and so on? How much investment experience does the client have?

Next, compare mutual funds with similar profiles and investment objectives. Comparing funds that are measured against different performance benchmarks is an exercise in futility that could also get you in serious trouble with your compliance department. Always present funds that are setting out with similar investment objectives and are measured against the same benchmarks, such as the S&P 500.

Finally, decide what features of each fund would fit your client's personal financial needs - for example, regular distributions, fund family exchanges, and so on. Below are a few examples of each point of comparison.

Client Objectives

  1. Does the client want growth over a long period of time?
  2. Is the client nervous about fluctuation in the stock market, but more than 10 years from retirement?
  3. Is the client retired and is income a prime concern?
  • If the answer to the first question is "yes", the client is looking for capital appreciation and may not be too bothered by periodic fluctuations in the market. He or she might consider a growth or aggressive growth fund.

  • The client that answers yes to question 2 should remain an equity fund investor because there are a few years left between now and retirement and he or she will need a vehicle to get him there. Perhaps you will recommend several growth and income funds or balanced funds to temper those market ups and downs that make your client so nervous.

  • The needs of the third client are markedly different from the client who has answered "yes" to question 1. An older client might want to consider a number of bond funds that contain a diverse portfolio of interest-paying, safe debt securities.

Suitable Fund Choices
Selecting the "best" funds is not the ultimate goal of the registered representative or principal. Selecting the best fund for each individual client should be. So, the starting point in selecting a mutual fund is to clearly define a client's investment objectives and then match the objective to the client's risk tolerance before matching the client to a mutual fund. Investment representatives must recognize the many dimensions of a mutual fund and then exercise good judgment in order to make an appropriate selection.

Compare Mutual Fund "Apples" with "Apples"
You must compare mutual funds that have similar stated investment objectives. It is foolish to recommend a mutual fund that returned 15% last year because you want to impress a wealthy client who tells you that Fred at The Other Bank recommended the boring-but-safe fund and that he is simply looking for a way to preserve his capital while staying ahead of inflation. In other words, don't compare a balanced fund with an aggressive growth fund, or a municipal bond fund with an equity income fund.

Individual Features for Individual Investors
Depending on the client's needs, you will recommend mutual funds from particular investment companies that offer certain benefits. These options may include conversion or exchange privileges, systematic accumulation and withdrawal plans, tax reporting, contribution amount tracking, and other features. Many of these benefits will allow your younger clients to conveniently add small amounts of money to their mutual funds, while your retirees can depend on monthly checks from systematic withdrawals as their retirement funds continue to grow. At the end of each year, investors will receive a 1099 from the fund company detailing the tax information necessary for income tax filing.

Fees and Performance
Both fees and performance should be considered when comparing mutual funds. A fund with higher-than-average fees may well produce a lower-than-average performance. When analyzing bond funds, it's important to take after-tax return and total return into account, not just the dividend yield.

Tracking Investment Company Securities Performance
Mutual fund quotations are available in daily publications such as The Wall Street Journal or the business section of your local newspaper. Financial sites such as Investopedia.com, Bloomberg.com and Yahoo! Finance offer free mutual fund quotes and allow you to search by the fund's five-letter symbol.

These websites also have a symbol look-up feature, in case you don't know the fund's trading symbol. Moreover, most investment companies now have their own websites where you can download prospectuses, fact sheets and detailed information on fund holdings and investment objectives.

Mutual Fund Characteristics and Taxation


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