How to Research Mutual Funds

by Ron Haynes

Once you’ve determined that an investment in mutual funds meets your risk tolerance and will help you with your preferred asset allocation, you’ll need to research which particular funds to buy. Though you may know the overall type of funds you need (such as bond funds, growth funds, or balanced funds), you still need to research specific funds to find those that have the traits you desire, such as management experience, expense ratios, and to help you weed out those funds that don’t.

Mutual Fund Screeners

Finding your ideal mutual fund investment is probably easier than you think. Why? Because of “screeners.”

Mutual fund screeners are free software applications on the Internet that help you find mutual funds that only meet the criteria important to you. To use a mutual fund screener, you select the specific limits you find acceptable for each of the fund’s criteria, such as total return, turnover rate, or expense ratios. The fund screener at Yahoo is among the most popular and easy to use, but those at Scottrade, Etrade, or Zecco are just as good … and maybe even better since you can easily initiate a trade after doing your research. TradeMonster, TradeKing, and even optionsHouse and optionsXpress also boast excellent screeners.

What screening criteria should I consider?

Below is my list of the most important mutual fund screening criteria, plus suggestions for the limits you should place on each (wherever applicable). Note that not all screeners include all of these criteria.

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Investment objective (or category)

The type of fund, such as U.S. mid-cap stock, international, or emerging-market bond.

Fund family

The fund company that offers the fund. You can narrow your choices to fund families you prefer, or to those offered by your company’s 401(k) plan.

Management style

Active or passive. Here’s a hint: read How A Second Grader Beats Wall Street and you’ll know (and understand) why passive is better. Not ready to buy the book? Then read my review!

Management experience

Screen for funds with managers at the helm for at least five years. Ten or more is better.

Total return

Look for returns over the past five to ten years that exceed the return of the most relevant index. For example, if you’re screening stock funds, look for funds with an average annual total return that exceeds that of the S&P 500 index for the previous five to ten years (admittedly, finding these is becoming increasingly difficult considering the economy and inflation). If you can find an after tax or an after tax and expenses return screen, use those numbers rather than the total return.

Turnover rate

Turnover is how often the underlying investments in the mutual fund are bought and sold. These range from the single digits all the way up to 100% and beyond. For taxable accounts, the lower the turnover, the better.

Expenses

Look for no-load funds with expense ratios below 1.00% for domestic and 1.50% for international. The lower the expense ratio, the better. It just means more money in your pocket.

Minimum initial investment

Most funds require you to buy at least $250 or so worth of shares at the outset; others have minimums of up to $100,000 or more. Adjust your initial investment requirements according to the amount you plan to invest in each fund.

Redemption fees

Some funds charge investors a fee (usually 1–2%) for selling shares before a specific time period elapses. If there’s any chance that you’ll need the money you invest within one or two years, screen for funds with no redemption fees. If you’re sure you’re be holding your funds for longer than two years, don’t screen out funds with redemption feeds. .

Found a mutual fund you like?

Once you’ve used a fund screener to identify a few promising funds, it’s a good idea to research those specific funds in more detail at your online broker’s website. Sites like Scottrade and Etrade both offer profiles of funds and fund families, plus added insight into fund performance, fees, and much more.

Mutual funds have taken it on the chin in recent years, and many people are claiming that they’re dead. Those people tend to ignore the fact that upwards of $23 TRILLION dollars are invested in mutual funds around the world. They aren’t going away anytime soon.

About the author

Ron Haynes has written 988 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.