Here’s how I research when I have new money to invest in a mutual fund:

  1. I Purchase a Morningstar Funds 500 book, which they print every year. This book gives you ample statistical information on what they consider are the top 500 mutual funds out of 8,000 investment choices. I also go to Yahoo Finance and research their mutual fund section.
  2. Check total average annual returns for the fund’s 5 and 10 year record. 1 and 3 years are too short, also if available, check this statistic for the fund’s inception date.
  3. Check the fund’s performance in down markets like the 2000 to 2002 corporate scandal-high tech bubble burst era. If it went down a lot worse than the S & P 500 index during the same time period and wasn’t rebounded very well, I would definitely avoid it.
  4. Yahoo Finance mutual fund performance shows the number of up and down years for most funds. Gold and emerging markets funds usually show up 10 years and down 8 years. Conservative investors should avoid these and technology sector funds if they want to sleep at night.
  5. Check standard deviation to see how volatile the fund has been over the last 10 years. If a fund has a higher 5 and 10 year annual return rate and a lower standard deviation than other funds in the same Morningstar style category, than it would be a decent choice. Funds that have much higher standard deviation rates compared to the S & P 500 index should be avoided by conservative investors.
  6. Diversify your investment portfolio with different fund types like balanced, large cap, mid cap, small cap, international, real estate, etc. Also make sure most of your funds have a value oriented investment style if you’re a conservative investor.
  7. Check the average company market capitalization size that your fund invests in. This way you know your funds don’t invest in the same size companies.
  8. Check the company industry sector percentages that your fund invests in. If it’s over 35% technology, I would avoid it if you’re a conservative investor.
  9. Check the growth in the fund’s total assets because a larger fund is usually harder to manage and the return rates might decrease over time. Some funds close their doors to new investors because of this issue.

 

 

Here are some issues to consider when selling or switching funds:

  1. Change in investment objectives like if you purchased a small company fund and now that fund is buying large cap stocks.
  2. When a fund manager leaves is probably not a major issue in large companies with plenty of talent like Fidelity, T. Rowe Price and Vanguard. However, it might be an issue in a much smaller investment company.
  3. If your fund’s performance is below average for 2 years in a row compared to its investment style category peers, it’s time to switch funds. Holding a decent performing fund while letting the dividends and capital gains reinvest for more than 10 years is a good way to create wealth.

CONCLUSION

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