5 Characteristics of Strong Mutual Fund Stocks


A diversified portfolio of high-yield mutual funds can provide an investor with an excellent vehicle for building wealth. However, with thousands of possibilities to choose from, selecting the right funds to invest can be a daunting task. Fortunately, there are certain characteristics that seem to share the best performing funds.

Using a list of basic characteristics as a way to filter, or narrow down, the massive list of all possible funds available for consideration can greatly simplify the task of selecting funds, as well as increase the likelihood that a bank’s choices will be made. investor are profitable.

1. Reduced fees or expenses

Mutual funds with relatively low expense ratios are generally always desirable, and low expenses do not mean poor returns. In fact, it is quite common for the best performing funds in a given category to be among those that offer expense ratios below the category average.

There are some funds that charge substantially higher than average fees and justify the higher fees by pointing to the fund’s performance. But the truth is, there is very little genuine justification for any mutual fund to have an expense ratio of much more than 1%.

Mutual fund investors sometimes fail to understand how big of a difference even a relatively small percentage increase in fund expenses can make to an investor’s bottom line. A fund with a 1% expense ratio charges an investor $ 10,000 invested in the fund $ 100 annually. If the fund makes a 4% profit for the year, then that $ 100 charge takes 25% of the investor’s profit away. If the expense ratio is 2%, half of the profit is needed. But a 0.25% expense ratio only takes 6% of the investor’s total profit. In summary, expenses are of the utmost importance to mutual fund investors, who must be diligent in finding funds with low expense ratios.

In addition to the basic operating expenses charged by all funds, some funds charge a “charge” or a sales fee that can be as high as 6% to 8%, and some charge 12b-1 fees that are used to cover the expenses of publicity and promotion. for the background. Mutual fund investors do not need to pay these additional fees, as there are many perfectly good funds to choose from that are “no-load” funds and do not charge any 12b-1 fees.

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2. Good steady performance

Investing in mutual funds is used by most investors as part of their retirement planning. Therefore, investors should select a fund based on its long-term performance, not on the fact that it had a really great year. The consistent performance of the fund manager (s) over a long period of time indicates that the fund is likely to perform well for a long-term investor.

The average return on investment (ROI) of a fund over a 20-year period is more important than its return over one or three years. The best funds may not produce the highest returns in a year, but they do produce good, solid returns over time. It helps if a fund has been around long enough for investors to see how well it manages during bear market cycles. The best funds can minimize losses during difficult economic periods or cyclical industry downturns.

A big part of good performance is having a good fund manager. Investors should review the background, previous experience and performance of a fund manager as part of their overall evaluation of the fund. Good investment managers don’t tend to go bad all of a sudden, nor do bad investment managers tend to suddenly become outstanding.

3. Stick to a solid strategy

The best performing funds perform well because they are driven by a good investment strategy. Investors should be clear about the investment objective of the fund and the strategy that the fund manager uses to achieve that objective.

Beware of what is commonly called “portfolio drift.” This occurs when the fund manager deviates from the fund’s stated investment objectives and strategy in such a way that the composition of the fund’s portfolio changes significantly from its original objectives. For example, you can go from a fund that invests in large-cap stocks that pay above-average dividends to a fund that invests primarily in small-cap stocks that offer little or no dividend. If a fund’s investment strategy changes, the fund manager must clearly explain the change and why to the fund’s shareholders.

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4. Reliable, with a solid reputation

The best funds are constantly being developed by well-established and trusted names in the mutual fund business, such as Fidelity, T. Rowe Price, and the Vanguard Group. With all the unfortunate investment scandals of the last 20 years, it is wise for investors to do business only with companies in which they have the highest confidence when it comes to honesty and tax responsibility. The best mutual funds are invariably offered by companies that are transparent and forthright about their fees and operations, and do not attempt to hide information from potential investors or mislead them in any way.

5. A lot of assets, but not too much money

The best performing funds tend to be the ones invested widely, but they are not the funds with the most total assets. When funds perform well, they attract additional investors and can expand your investment asset base. However, there comes a point where a fund’s total assets under management (AUM) become so large that they are difficult to manage and cumbersome to manage.

By investing billions, it becomes increasingly difficult for a fund manager to buy and sell stocks without the size of your transaction changing the market price, thus costing more than you would ideally want to pay to acquire a large amount. of a specific action. This can be particularly true for funds looking for undervalued and less popular stocks. If a fund suddenly seeks to buy a stock worth $ 50 million that normally doesn’t trade much, then the demand pressure injected into the market by buying the fund could drive the share price substantially higher. This would make the stocks less attractive than they appeared when the fund manager evaluated them before deciding to add them to the portfolio.

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The same problem can occur when the fund seeks to liquidate a position in a stock. The fund may have so many shares of the shares that when it attempts to sell them, the oversupply can put substantial downward pressure on the share price, so that although the fund manager intended to sell the shares at $ 50 a share, by the time you are able to fully liquidate the fund’s share holdings, the average realized sale price is just $ 47 a share.

Investors may want to look for mutual funds that are well capitalized, indicating that the fund has successfully attracted the attention of other investors and individual institutions, but has not grown to the point where the size of the fund’s total assets makes it difficult for the fund to be managed skillfully and effectively. Issues in managing the fund’s assets may arise as the fund’s total assets grow beyond the $ 1 billion level.

The bottom line

Mutual fund selection is always a personal endeavor that should ultimately be guided by the individual’s investment goals and plans, their level of risk tolerance, and their overall financial situation. However, there are some basic guidelines that investors can follow to streamline and simplify the fund selection process and hopefully result in the investor acquiring a profitable fund portfolio.

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Mark Holland

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