How to Spot Good Mutual Funds

The explosion of the 401(k) and decades of dwindling employer pensions powered mutual funds to dominance in the investing landscape. The funds, once meant to simplify investing for the little guy, flourished to the point of becoming almost as confusing to pick as individual stocks. What can you look for?

“Investors get overwhelmed. And when their money grows, the risk becomes even greater,” said Frank Congemi, president and chief executive officer of Benefactor Financial, speaking at a recent panel on financial planning

The panel, “Picking Mutual Funds,” was part of National Financial Advisor Week in New York’s Times Square. This event, which attracted hundreds of onlookers, featured financial advisors giving tips on personal finance, ranging from retirement saving to college funding. The panels also focused on how people can get the most out of advisors. At the event, Jennifer Rufener of Dover, Ohio, won a sweepstakes for a free college education.

What’s the fund for? Mutual funds offer an easy way to build different portfolios to meet different objectives in your life. “Nobody says you need just one portfolio,” Congemi added.

Analyzing funds uses commonsense steps similar to doing due diligence on stocks. If a fund outperforms market benchmarks, for instance, examine that fund’s risk metrics, said co-panelist Stephen Schwartz, wealth management advisor with Pioneer Financial in New York.

Also, “look at the overall strategy of a fund and see how the fund did when that strategy had difficult times,” Schwartz added. Congemi advised looking for reasonable expense ratios, transparency in fees and consistency and involvement in managers.

Diversify and stay in for the long haul: “‘Long-term’ means ‘long-term,’ not ‘just until you change your mind’,” Congemi said.

What else to watch for in mutual funds, according to panelists:

  • Some funds overload on one sector, such as technology, to juice returns. If that sector happens to tank, the fund suffers disproportionately.
  • Managers reallocate funds’ holdings frequently. “Six weeks [after putting in money] an investor might own a completely different fund,” said Schwartz, who recommended checking allocation in your funds as often as twice a year.
  • Beware old monikers. What constitutes “value or growth,” for example, can change over time.
  • Mutual funds’ latest competition, exchange traded funds (or ETFs, baskets of securities trading on exchanges throughout the day), sometimes do offer lower fees, and trade faster than mutual funds. Lightning trades may not offset ETFs’ occasional lack of transparency and other drawbacks, though. “Not many of my clients say they have to get out of the market right now,” Congemi noted.
  • Morningstar ranks as one of the best sources of news and information on mutual funds.

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