If you have and IRA or other investment accounts there's a great chance you'll count among your holdings a mutual fund or two. That being the case, you'll probably want to find the best performing mutual funds to maximize the power of your retirement savings. A mutual fund is basically a group of different investments run by a fund manager, who ostensibly knows more than you do about investing, especially in one or more particular areas.
In many cases, mutual funds are made up of different securities that have some type of similarity. There are funds that are made up entirely of stocks, known as equity funds. Others are primarily composed of debt instruments, these are called, appropriately enough, bond funds. Sometimes the funds are made up of stocks of companies with particular characteristics. These are classed according to the particular attribute that loosely defines all of the stocks that make up the fund. Some examples would be growth funds or value funds. Growth funds are made up of stocks that demonstrate capital appreciation, where value funds look to count among their holdings primarily equities that investment professionals feel are undervalued and have great potential for future growth.
Some funds are defined by their market capitalization (the total value of their outstanding stock). These are typically known as large cap, small cap, mid cap, and micro cap funds. Basically large cap companies are large, and small cap companies are small. Pretty easy, huh? Large companies are usually more stable, while smaller ones are more volatile, but can offer more growth potential (but that rule definitely does not apply not all the time).
There are also income funds. These babies are composed of financial instruments that pay good dividends, which are then either reinvested if the aim is to achieve growth, or withdrawn, if the aim is to sustain a lifestyle. Stocks that pay handsome dividends are typically from solid, established companies. They don't experience the same amount of capital appreciation, but are not as likely to depreciate either. For this reason, and the aforementioned income possibilities, they are often used by older investors that seek to obtain steady income and capital preservation to serve them in their retirement years.
Some mutual funds specialize in a certain industry or group of companies. These are known as sector funds. Examples would be funds that deal primarily in energy companies, transportation, electronics, communications, computers, and so forth. These have the potential for tremendous growth, if the particular sector is rapidly expanding. However, they can be devastated if the sector takes a large hit, as happened with many tech related sectors in the early part of this decade.
There are also mutual funds that are defined as combinations of terms, such as large cap value funds, or small cap sector funds. In such cases they are just more tightly defined for investors that are looking to more narrowly invest in stocks and/or bonds with certain characteristics.
Given the huge varieties of mutual funds available to the average investor, how can you find the best performing mutual funds, without sifting through financial data for endless hours? Many of you probably don't find that all too stimulating. Keep in mind that performance should mean different things to you depending upon your requirements and where you lie in your investing life cycle. Also remember that most investment advisers (I am not one) recommend a buy and hold strategy when aiming to maximize retirement savings.
Here are some ways to easily find the best performing mutual funds:
Best Performing Mutual Funds - Lesson 1 -Look at the past performance numbers. All mutual funds have published statistics to make comparing them easier. You'll be able to see how much they have gained this year to date, over the past year, five years , and since the fund's inception. Keep in mind that many excellent funds can have a down year or two, so be careful of letting poor current year performance solely determine your decision.
Best Performing Mutual Funds - Lesson 2 -Don't forget the expenses. Those fund managers have to get paid somehow. They are paid by charging the fund's shareholders a fee. The fees also cover administrative expenses incurred by the fund. This fee is often called a “load”. This fee will be subtracted from your returns, so it is definitely worth examining when making your decision. No load funds shareholders aren't charged a fee. Lower fees are better, obviously, but need to be viewed against the background of the fund's overall performance. This will be listed in the fund' prospectus as the “expense ratio”. Lower numbers translate to lower expenses. Remember that small numbers can add up to big numbers during the length of time you'll hold your investment.
Best Performing Mutual Funds - Lesson 3 -Take a deeper look inside. You wouldn't buy a car without looking under the hood, even if you aren't a mechanic. The same should be true for your mutual funds. Look at the industry the particular fund is invested in, and the companies that it holds. You don't have to perform an in-depth analysis, that what they pay the mutual fund company for. However, you should look to see if they hold anything that looks like an obvious dud. You want to stay away from any “here today, gone tomorrow” stocks, especially if you are investing with an eye towards that tomorrow.
These are just some simple rules to help you find the best performing mutual funds. Remember that a bit of caution now can pay huge dividends later (especially if you're investing in a value fund).
No comments:
Post a Comment