Check out Mutual Fund parent article before analysis.
Investors should follow some guidelines for selecting their best-fit mutual fund. Some analysis guidelines are purely based on common sense.
1] Normally, a fund is considered good if it is high-rated. Still, this years best-rated fund might not stay the best next year as well. If a particular fund gets excessive funding, it generates a good return that year but many times that story does not carry forward following years. They become an instant hit and people invest in them the following year and end up losing their money. How can you save yourself from such funds? We can check for long term ratings. What were the ratings past 5 – 10 years, did the fund’s capital increased exponentially in the previous year? etc.. So the idea is quite similar to the stock investment. When a stock sees fundamentally good returns, people invest in them. Often times, public sentiment attracts more and more investors and the price goes higher than what it should deserve. So the people joining the ride late are going to lose money when stock gets corrected. It’s quite similar funda.
2] Each fund has ranks and ratings to help us compare funds. As I said in the previous part, the past is very important. But along with the last 5 – 10 years of rating, returns, and ranking, it is also important to understand why the data is low or high. It is absolutely necessary to understand how the fund had performed in bearish and bullish cycles. If a fund had performed “ok” even in the bearish market, we can say the portfolio is fundamentally good. The returns shouldn’t be just good in only bullish cycles. A fund could happen to enjoy the ride of the bull phase and bag the highest rating.
3] Fund managers. Fund managers are the people who have all the portfolio strings in their hands. They are the ones who are responsible for the good and bad performances of any fund. So it’s absolutely necessary to know your fund manager’s track record. If a fund is doing good over the time and also have great ratings, one would say, “this is the best fund.” But what if the previous fund managers had recently quite. We don’t know the new fund manager that well. So to decide, one should always check if the fund managers are good.
For your blog and article needs, check out my Fiverr gig. Let’s connect…