According to U.S. News and World Report, there are an estimated 4,600 mutual funds in existence in the United States at this very moment. Of those, the majority will fail over the next decade. If you’re an investor, seeing these statistics doesn’t exactly bring you hope. However, if you can learn to evaluate mutual funds performances, giving you the tools you need to better compare mutual funds side by side, you can avoid the sinking ships and make sure you hop on-board something that can sail you to investment success.
Three Tips for Judging Mutual Funds Performance
- Don’t Look at Single-Year Performance
- Look at the Ratio of Expenses to Returns
- Compare and Contrast Mutual Funds Ratings and Performance
For Investopedia, the key to properly assessing mutual funds performance is to look at the big picture. Just because a fund you’re considering showed 65% returns in one year, that doesn’t mean you should believe it’s a safe bet. What do its three-year or five-year numbers look like? If those numbers or solid, you might be on to something.
U.S. News and World Report recommends you take a hard look at the expense to return ratio of each fund on your “maybe” list. Brokerage fees, trading fees, and other fees should all be considered here. How do those fees compare to what you expect to make back? Remember, you want the ratio of fees to return to be weighted heavily toward the latter.
After you’ve gathered the numbers for multi-year performance and the expense to return ratios of each fund you’re considering, you should obviously sit down and compare each one to the others. Is it worth it for you to choose a fund with a better record, or should you choose something with a somewhat worse record but a much lower fee to return ratio? Consider every angle before making a decision.
As you can see, judging mutual funds performance doesn’t have to be rocket science. Follow these tips to get a better idea of just what it is you plan to invest in. Doing so, you can ensure any mutual funds investment you make is a smart move for your future.
