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Are All Mutual Funds Created Equal?

How do you know which mutual fund is best for you?

Mutual Funds are great! They make investing easy and limit risk.

The problem is, there are a lot of mutual funds to choose from, and they are not created equal.

In a study done by Dimensional Funds, they concluded that most mutual funds fail to meet or exceed their benchmark. That means most mutual funds don’t perform well. Another proved this by showing that only 14% of mutual funds over the past 15 years were considered “winners”.

Here is what you can do to find the best mutual funds:

  1. Do not choose based on past performance –
    Just because a fund performed well last year, does not mean it will perform well next year. Only 26% of stock mutual funds that were in the top 25% the past 3 years were able to stay in the top the following three years.
  2. Evaluate the costs –
    Each mutual fund has costs associated to it. Looking into what all of those costs are and how they impact your return are important.
  3. Diversify!
    Ensure the funds you invest in are spread out over multiple types of companies and opportunities. Ensure your funds include things like global opportunities, real estate, and other investment types.
  4. Ensure the proper “factors” are being weighted in the fund –
    Successful mutual funds typically include companies that include these factors: small companies, value companies, and profitable companies.
  5. Limit your tax liability –
    Different investment types have different tax consequences. Looking into how the taxes is being paid on the mutual fund’s returns is key.

Bottom line is this – There is not such thing as a simple get rich quick mutual fund. There are no “magical” funds. Do your research. Research the right things. And partner with a wise Adviser that you trust.

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