This is the time of year you're likely to run across lists of last year's best-performing mutual funds. Be careful, though. They're not all outstanding funds; so don't fall for a fluke.
Consider, for example, a list of 2003's best performers from USA Today. The top-ranked fund is Apex Midcap Growth (FUND: BMCGX), with a total gain of 165.3% and 14.4% in the fourth quarter. Sounds impressive, eh? Well, a quick look at the fund's snapshot on Morningstar.com reveals that though it gained 165% in 2003, it lost 42% in 2002, lost 7% in 2001, lost a whopping 76% in 2000, and gained 42% in 1999. Those gains are big, but so are the losses.
Making matters worse, the fund sports a 5.75% front-end load, meaning that $10,000 invested in the fund immediately becomes just $9,425.
True, lists of best funds will contain some real gems. But they're also very likely to contain a bunch of funds that simply had an unusually outstanding year -- funds that are not likely to turn in similar performances in the coming years.
Even lists of the best funds over multi-year periods can be misleading. If a fund has four mediocre years and one outstanding one, that single large number will end up boosting the fund's total average performance. Dig through a fund's past performance in detail, looking at how it did in each of the past five or 10 years. Ideally, results won't be all over the place.
You'll find much more on mutual funds in our Mutual Fund Center, and on our Mutual Funds discussion board, where Fools are discussing funds in general and many outstanding funds in particular. (We're currently offering a free trial of our board community.)