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Enter Index Funds

Since most funds' fees leave them underperforming the market indexes, the key is to find a fund that at least matches the market and has minimal fees. There is an easy way to do just that. You need only buy a passively managed fund that tracks the index and charges super-low fees. Enter index funds. On the whole, index funds have lower expenses and are more tax-advantaged because their holdings don't turn over as much.

But if you've got an itch to shoot for higher returns than index funds offer, or don't have access to an index fund in, say, your 401(k), there are some funds -- or, more precisely, some fund managers -- whose services are worth paying for, because they are superior investors who are simultaneously fee-conscious.

To find out which funds are worth owning, let's put your mutual funds through the paces to help you spot the gems and dump any losers you might own. In particular, you'll want to look at:

  • Assessing the costs of a mutual fund, taking all fees into account.
  • Measuring the after-fee returns of mutual funds.
  • Defining a superior fund in qualitative and quantitative terms, so you'll know when you've found one.

Read on to see how we narrow down the world of mutual funds and what criteria make a Fool-Friendly Fund.

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