My random thoughts,useless and useful informations I gather, my financial thought process, investments, research, general knowledge, frugal consumerism ideas, Best deals - a mixture of all these are in my blog entries

Tuesday, January 17, 2006

Thoughts on Mutual Fund selection

I am trying to compile a list of criteria's for choosing Mutual funds and write it down. I remember, when I first started investing on Mutual funds it was easy - yes stupid, but it was easy. Its was my 401k and employees were offered only 7 choices. Without knowing much about investing itself, I choose 4 funds, which had the best previous year return. Needless to mention it turned out to be the worst choices. I wonder why didn't I read that fine print in bold then... PAST PERFORMANCES ARE NO GUARANTEE BLAH BLAH. Well, even today the past performance history are main criteria but I have improvised. My thoughts are like this, and to certain extend I do follow these nowadays.

Buy only a NO-LOAD fund - I am not paying up 5% of my hard earned $ as front, middle or back load. I will live with smaller returns than paying another set of premium to invest.

Low expense Ratio, preferably less than 1.0% - Just like the first point, when you do the mathematics you would know how much these management fee etc eats into your funds. For an international fund, we could relax it limit.

Better returns than the S&P 500 index in both bull and bear periods - If the manager is not good enough to beat S&P500 consistently, why bother ? I have my index funds with minimal expense ratio.

Not more than 2 down years in any 6 year span - If the fund can't turn around the ship from two years of bad experience, that Manager is not worthy to manage your $.

Funds with at lease 5-10 year of existence with a long serving Manager(s) - well I have cheated on this criteria, may be I think that boom years of late 90's and bear market of 2000-03 changed some old philosophies, some alternate hybrid strategy funds are doing great.

Low turnover ratio for taxable account : Other than the obvious tax issues, If the manager is too trigger happy, its not a very good thing