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Past Performance

Although past performance is certainly not an indication of future results, there are some clues to be found about the quality of a fund by correctly measuring its past performance.

Morningstar, a company that specializes in mutual fund analysis, provides helpful tools to compare funds. One is the fund selector, which allows you to retrieve the top-performing funds in various classes. You can, for example, search for all the domestic stock funds that invest in financial companies and rank them by performance. That will tell you how your fund measures up against its direct competition in raw performance. You can also measure how it has done in relation to various market indexes (like the Standard & Poor's 500).

After you've looked at how a fund stacks up against its peers and the S&P, you just buy the one that comes out on top, right? Wrong. You've only taken the first step to discovering how your mutual fund has performed, because stated returns don't include all the fees that you will pay or predict future success. Two funds may have the same reported return, but they may not have returned the same rate to investors.

Why? Funds can charge fees beyond those required to operate them because most people don't pay any attention to them.

Ferret out the fees

In addition to the process of assessing risks and estimating future returns or prospects common to any investment, with mutual funds you must also evaluate and compare costs between funds. The trick is to decide which fund(s) will give you the biggest bang for your investment dollar within your risk class.

The trouble is that it's hard to know exactly how much you're paying, since funds don't put the fees all in one place. You have to piece together a variety of expenses to find out how much you are paying for the service. Of course, it's not that hard if you know what you're looking for and where to look.

Where to look

  • All fees appear in the fund's prospectus.
  • You can also find fees in the "Fees and Expenses" portion of a fund's Morningstar profile.

Sure, most people never read those things. But that's why so few people find the truly great mutual funds that are out there.

To learn more about why fund fees are so important, take a look at this article.

Even after you've looked at fees, you're not done. Next, we turn to the other qualities of a good mutual fund.

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