Evaluation Tools for Mutual Funds

Consider the diversity of a fund management team.

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Mutual funds are offered by large institutional investors that pool the money of individuals to invest in stocks, funds, bonds and financial activities. They have a wide variety of characteristics and success rates. You should use a range of research and evaluation tools to choose the funds most likely to suit your financial goals.


The first things to look at are the fund's stated goals and investment philosophy. Most mutual funds have clear and discernible strategies. The strategy should make sense and appeal to you if you are going to trust a fund with your money. The most effective tool for discovering a fund’s philosophy is its website. The information there typically can tell you the fund's in-depth strategies, based on the underlying trading philosophy of the company. Some funds might emphasize stable and gradual growth while tracking the market or a certain sector. Others might be oriented toward explosive growth from emerging sectors and economies. Others might specialize in risky financial instruments. It's crucial to find a fund whose goals and investment style you trust.


Next evaluate how the fund has performed in real life. It's important to compare the results of any mutual fund's strategy to its stated objectives. Use benchmarks, which compare funds based on the indexes they are listed on, to gauge the performance history of a fund. Check the benchmarks to make sure the fund's actual performance history measures up to its objectives and explanatory materials. Some funds might have good reason to boast, and it's a good sign if your investigation validates their claims of success. Though it's not required, a financial adviser or broker can be another helpful tool to help you do detailed research on your options.


Next, look into the management team and how it conducts its operations. The fund’s SEC-required prospectus provides information you need about the management team. A prospectus typically is updated and issued every six months. The annual report is another tool that can help you discern the movements of a fund’s leadership. Consider the members' experience. Some management teams include young talent. That isn't necessarily bad, but it can indicate a lack of experience with the ups and downs of the market. Study the turnover rate to gauge the longevity of the fund managers and their commitments to the company. Look for the amount of bonuses fund managers receive, and weigh their performance against the profits earned by investors.


Every mutual fund has a variety of operational expenses that cut into your profits. Look for a fund that minimizes these costs through efficient operations. Any competent management team should be able to keep the inevitable costs of operation to a minimum. Mutual funds behave like brokerage teams, and most of them charge fees. In theory, the fees are charged for doing research, making investment decisions and finding buyers and sellers on your behalf. Look into these fees and when they are charged -- for example, upon selling -- to determine whether you are comfortable with their rates. The Financial Industry Regulatory Authority has an effective tool, called the Fund Analyzer, that allows you to compare fees of up to three funds at a time (see Resources section). You’ll also information about a fund’s fee structure in its prospectus, required by the Securities and Exchange Commission.