Sunday, September 12, 2010

Top performing Mutual funds

Will Top performing Mutual funds Continue to out perform in future?



Note: If you don't have the patience to read the most critical points in buying mutual funds described below, go ahead and click the links at the bottom of the page for top performing mutual and etf funds

If selecting mutual funds are as easy as investing in those with the best past performance, most of will be millionaires. Many of us are guilty of the stupidity of chasing the top performing Mutual funds. How many times  did we beat the market?

You have read this several times- Past performance does not guarantee future results. Is past performance really indicative of future results? Most mutual fund companies boasts about their top performing mutual funds. You can see their 5 or 10 year average annual returns in graphs and numbers. They describe how their fund managers are smart enough to beat the S&P 500 Index. But if you read the fine print it says, Past performance does not guarantee future results. 

What to look for when choosing Top performing Mutual funds?

When selecting mutual funds, make sure that you are not using past performance as your single measure for selection. While it is completely reasonable to analyze the long-term (10 years) performance of the fund, some of the most critical factors in fund selection are:

Fund manager

What are the fund manager’s credentials, experience, and track record. Does he have a reliable investment history? When you buy an actively managed mutual fund, you’ have to verify who is managing the fund. The fund manager’s goal is to outperform the market and beat the competition. When the fund  manager is a celebrity, investors pour more money into that fund, chasing returns. Select the mutual fund if the fund manager has an excellent reputation and a good track record. Read up on some financial publications (wall street, Morning Star, etc)for their favorites managers.

What are the expense ratios?
Most important factor when choosing a fund is the expense ratio. Pay close attention to the expense ratio number. Verify if the mutual fund is a no load fund and has no 12 B-1 fees. The key difference between managed funds and index funds is the the higher costs imposed by actively managed funds. These costs come in the form of loads and expense ratios. Check if there are any front-end fees when you buy or selling commissions when you sell? Avoid mutual funds that has either a front load or back load fee (known as sales charge or redemption fee). You want to buy funds that have the lowest expense ratio. For example if you have to select between two funds with expense ratio of 0.50% and 1.0% respectively, the one with 1% fees will be eat away big chuck your income (think over a period of 10 years) resulting in poor performance.

Turn Over ratio of funds

You need to choose funds with a low turnover, no higher than 30% a year, and preferably closer to 15 to 20% range. Turnover is a measure of how long the mutual fund holds on to the stocks it initially bought. The longer the time the fund manager holds on to a stock in his portfolio, and less trading the fund does, the lower the turnover will be. Why Lower turnover ratio you may ask. The concept behind this very simple. Every time a fund manager sells or buys stocks for his fund, fund incurs transaction fees. So if the turn over is high, the higher transaction costs needs to be observed by the fund as well as paying the capital gains taxes. So the cost of the funds goes up. So the recommendation is look for funds that buy and hold stocks for long period of time similar to index funds. Typically Index funds have turnover lower than as 8%. where are some actively managed funds have turn over of 80%

Cash Reserves

The Mutual fund cash reserve should not exceed 5%. Higher cash reserves indicates ineffective use if capital (dead capital) and lost revenues

Fund past performance

Analyze the following
  1. How well did the fund performed during both bear and bull markets?
  2. How does the fund compares against the competitor’s fund?

A mutual fund's past performance track record is less important compared to the other factors described above. Many funds that outperform the stock market return in 10 years could go down in the next 10 years. Compare a fund's performance not only against S&P 500 but also against funds that have similar Morning star style box funds. Make certain to analyze the stability of the fund's returns that you are buying. You want funds that have demonstrated excellent returns over a long period of time (at least 10 years) as well as on a consistent basis, rather than ad hoc returns- ups and downs like a seesaw curve

Now use the link below as ONE of your factor and NOT the only factor. Click on the link below on the top performing mutual funds. DISCLAIMER: Past performance does not guarantee future results!