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Mutual Fund Education

How to Research Mutual Funds

Aaron Levitt Sep 26, 2014



Be sure to read the 7 Questions to Ask When Buying a Mutual Fund


The First Steps


Someone planning to spend the money on a vacation in a year probably doesn’t want to load-up on risky biotech stocks. Likewise, if you’re investing for retirement 30 year from now, a money market fund most likely won’t give you enough in the return department. Figuring out just what the purpose of your investment is is a simple, but a very necessary, step.

Once you have an idea of what you’re actually looking for—stocks, bonds, etc. can actually begin the screening process.

Most brokerage accounts offer basic screeners that break down the various categories of funds. For those investors without a brokerage account and looking to directly invest with the mutual fund company itself, both Morningstar.com and Lipperweb.com offer free extensive screeners. Using either method, you can select a style—Domestic Large-Cap Value Stock Mutual funds for example—and the screener will spit out a list of all the funds in that category along with their various stats.


Combing Through the Data


First, investors should look at the five- and 10-year performance of the fund. While they are backward looking metrics, these longer-term performance statistics really show how the mutual fund has performed over time. Shorter measurements—six months, one and three years, for example—don’t really give enough of the total picture. It’s important to note that past performance is no guarantee of future returns, but it can be a good indicator.

Another piece to that performance is manager tenure – considering that most mutual funds are actively managed. Most screeners will also report this. If a mutual fund has great long term returns, but the current manager has only been at the helm or affiliated with that fund for a short period of time, odds are that he or she isn’t responsible for those gains.

Another huge factor to look for during the screening process is fees and costs. The expense ratio is the ongoing fees that you will pay to the managers for owning the fund. While 2% may not seem like that much money at first, over time that 2% can really be taxing on your bottom line. Nothing saps performance more than fees in the long run. Morningstar’s screener will show whether a fund’s expense ratio is above or below average for its category. In general, sticking with funds with expense ratios below 1% is a good idea. Additionally, various mutual funds come with front-end or back-end sales loads depending on the share class; this is typically 1% to 5.75%. These costs can also majorly sap returns – especially in low returning assets classes like bonds. Finding a no-load fund in a particular category is preferred, although it can be worth paying the load for a fund that has continued great long term performance.

See also The Cheapest Mutual Funds for Every Investment Objective

Finally, investors should note the minimum investment required. After all, investment minimums vary and you could actually be priced out of your first choice if all you have is $500 to invest.

Once you get more familiar with just exactly what you are looking for, screening software allows you set toggles for things like expenses returns and expenses. It’ll kick out whatever funds do not meet your criteria and can make searching for the right fund even faster.


Checking the Prospectus


Once you do pick a fund, you’ll receive quarterly reports through the mail or electronic means. Reading through these documents will give some idea on just what is happening with your investment. You can then decide if the fund is meeting your goals and objectives. If it’s deviated too much or you’ve changed, you can always sell and find a different fund better suited to your needs.

See also How to Read Your Annual Mutual Fund Report


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