When it comes to choosing an appropriate mutual fund, there is far more to consider than just the rate of return for the past year or even the previous decade. Picking a mutual fund based on the most recent popularity rankings is also not a prudent investment decision. In order to build a well-rounded mutual fund portfolio, it is critical to carefully review the prospectus of each and every mutual fund that is of interest.

What should potential investors consider when selecting a mutual fund?

1. Fees and expenses. In addition to a management fee, some mutual fund companies also charge a distribution fee as typified by the 12b-1 fee. A 12b-1 fee is a fee that covers marketing and distribution expenses that are incurred by the company. Investors should also be aware of other fees such as a redemption fee or reinvestment fee (a fee that a mutual fund company charges to reinvest dividends), exchange fee, custodial fee as well as other miscellaneous administrative fees. Investors should examine the expense ratio of the fund. The expense ratio is derived from dividing the mutual fund’s expenses by its average net assets.

2. History of the mutual fund company. How long has the company been around? What is the track record of the mutual fund company and how does it compare to its peers? What is the company’s approach to investing? What about the age of the mutual fund in question? Does it have a long, well-established track record or is it a relatively recent fund?

3. Investment objectives of the fund. Do the investment objectives of the mutual fund match your financial objectives?

4. Management of the mutual fund. Whereas in previous years, one might have glossed over this particular aspect, potential investors should take the time to become better informed about the management of the mutual fund by reading biographies of the various fund managers as well as press releases published by the company. The mutual fund company’s newsletter is a tremendous source of information and one way in which investors can learn about the various mutual fund managers and their investment approach.

5. Mutual fund asset size. This particular point is controversial in that some investment advisors believe that an excessively large fund may not be as nimble and effective as a smaller fund since its bulky size may undermine its ability to successfully fulfill its investment objectives. In some cases, when a mutual fund becomes excessively heavy in terms of asset size, the manager(s) may decide to close it to new investors in order to maintain its investment edge. Yet, there are also many mutual funds that have an extremely large asset size and continue to accept new investors.

6. Portfolio allocation of the fund. Do the investment holdings of the mutual fund match its objectives? Compare the portfolio allocation of the mutual fund to funds within its own peer group. Does it compare favorably? What is the fund’s cash position?

7. Risk, as expressed in terms of interest rate risk, credit risk and market risk. How well has the mutual fund performed in relation to the risk/reward ratio? Is the market risk posed by the mutual fund compatible with your own risk level? How does the fund rank among its peers in terms of risk and performance? How has the mutual fund performed during bull and bear markets?

8. Sales charges
a. Front-end load
b. Back-end load (sometimes referred to as a contingent deferred sales load.)

9. Taxes. It is important to review the before and after tax returns as presented in the prospectus as well as have a complete understanding of the tax liability that may be incurred with regard to dividends and capital gains distributions.

10. Turnover (is simply the length of time the mutual fund holds the securities). Turnover is an important consideration and can exert tax consequences in terms of short-term and long-term capital gains.


For informational purposes only and not intended as investment advice