Mutual funds can be an excellent entry point for new investors and also a practical choice for more seasoned investors. With virtually an endless variety of mutual funds to choose from, there's likely a mutual fund out there that will meet the needs of just about anyone. Bear in mind that behind every mutual fund is a fund manager. These financial professionals are responsible for choosing a portfolio of investments based on the specific fund’s strategy, with the goal of maximizing the fund’s value for its shareholders. There are numerous criteria that you can use to rate a mutual fund manager to see if they're truly performing at their best. (See related: Finding Lower Risk, Higher Return Mutual Funds)
As a substantial metric, performance should be the primary measurement that anyone should look at before investing in a mutual fund. A fund manager should be able to frequently exceed the benchmark index, which is a standard that most mutual funds are measured against. In essence, since a fund manager is usually charging more to actively manage a mutual fund’s investment decisions, they ought to be able to perform better than a passive index does.
Ratings and Rankings
Third-party investment information services like Morningstar and Lipper are highly regarded when it comes to rating mutual funds in comparison to other funds in the same investment categories. In the case of Morningstar ratings, they use a weighted average star system that ranges from a one-star (poor) to a five-star designation (favorable). These ratings are derived from such details as a fund's past performance, risk, and cost-adjusted returns as well as its consistency in performance.
Lipper is an investment service that ranks mutual funds numerically on however many are in that one category. For instance, if there are 700 total mutual funds in the domestic stock fund category, Lipper assigns each fund a numbered rank for its respective one-year, five-year and ten-year performance. Lipper tracks total return, which includes the reinvestment of capital gains and dividends.
How long a fund manager has been managing a particular fund can be a useful piece of information. Typically, the longer the manager's tenure, the more likely that they're performing at a level acceptable enough for many investors. Moreover, investors should research to see if the manager runs multiple mutual funds. If so, this suggests that the manager has considerable competence in selecting portfolio investments.
As imperative as positive returns are for a mutual fund, keeping expenses at a minimum is also vital. A fund's expense ratio is a key metric that conveys what an investment company charges to manage a fund on an annual basis. Ideally, this number should not be too high when compared to that of other funds in the same investment category, as above-average fees could have a long-term effect on your investments' compound growth. (For more, read: Pay Attention to Your Fund's Expense Ratio.)
Turnover is something investors might not immediately think of when evaluating a fund. This figure states what percentage of investment shares were exchanged over a particular period of time, and since buying and selling investments contain costs that funds will ultimately pass on to investors, a lower number is considered ideal. If the figure is comparatively higher than those of other funds, investors should look at the optimal fund performance to determine if the higher-than-average turnover looks justifiable.
A mutual fund’s portfolio net assets are, essentially, all of the dollars that are invested in the fund by shareholders. When you're comparing fund options, this information provides insight on where the most money is invested. So it's an implied sign of confidence when a mutual fund has higher net asset levels, as this indicates that investors are exposing themselves to greater risk in turn, hopefully, for a greater reward.
The Bottom Line
Beyond the brief snapshot of a mutual fund lies a myriad of statistics, which can be beneficial for a prospective investor. By performing a thorough analysis of all available information, investors can assess a mutual fund manager fairly and in good detail. Armed with this information, individuals can invest in a mutual fund with a good amount of confidence in whatever selection they decide. (Suggested further reading: The Basics of How Mutual Funds Are Rated and When Are Mutual Funds Right for Your Client?)