January 15, 2009

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Investment Wise

Tips for Choosing the Best Mutual Fund

Owen J. Fisher

January 15, 2009

The stock market’s recent ups and downs have caused investors to rethink their current investment allocations and how to reposition their portfolios. But, with more than 10,000 different mutual funds and an increasing number of a relatively new investment vehicle called exchange traded funds, the options may seem limitless and, therefore, overwhelming. So what should you be looking for in a mutual fund to get the best results? Here are a few tips to consider when investing in mutual funds. Assess the Situation An investor should first assess his or her current situation by determining his or her investment time horizon and the acceptable amount of risk. Time horizon and risk aversion should have a large impact on what types of funds are used. To summarize, a mutual fund is a pool of individual stocks or bonds a money manager will choose and manage for the funds “style” or investment focus. In general, an equity fund manager will not hold more than 50 stocks and typically will not allocate more than 5 percent to any one investment. Fund managers usually have experience in areas such as domestic large cap, international, small cap or mid-cap styles. There are also sector-specific managers in technology, consumer staples, financials, energy, etc. Mutual fund managers should be gurus of their field and strive to maintain a track record that outperforms their peers over time. Mutual funds and similar “subaccounts” have become the majority of investor’s investment choice for allocation of their core investments. There are various investment vehicles available for individuals to invest in mutual funds. A few include 401(k) plans, IRAs, individual or joint accounts, 529 plans, variable annuities, variable life insurance policies, pensions, etc. Ask Yourself... There are a few detailed questions you need to ask yourself before you invest. First, determine the tax efficiency of the available funds if they are held in a taxable account and what potential capital gain distributions will occur each year. One of the biggest problems with mutual funds is that they can be very tax inefficient. For example, suppose an investor buys a mutual fund for $100,000 on Oct. 1. Then assume the fund dropped in value from $100,000 to $80,000 by December of the same year. Even though the fund dropped in value, there could be a potential tax liability if the mutual fund distributes gains realized throughout the year through trading and/or dividends received. Based on the fund managers reporting and tax distributions, you may still have to pay taxes on gains the fund made previous to you purchasing the fund. This is a common mistake investors make and should be reviewed before purchasing any mutual fund in a taxable account. Next, look at the “true cost” of the fund. Mutual funds can charge fees for the following: marketing, 12b-1 fees, management fees, advisor fees and trading costs. Some mutual fund fees can be as high as 4 percent annually or more. Mutual fund sales loads should be carefully assessed before making an investment decision. These “sales loads” can be charged upon purchase or the sale of a mutual fund. Do not be mislead by information someone gives you and assume “no-load” means no costs associated with the funds. Look for managers with a long tenure of managing the same fund including periods of ups and downs within the market. Also, do not put all of your assets in one particular fund; diversification is crucial, even in an aggressive portfolio. Individuals and companies have been sold many different investment vehicles during the years by mutual fund companies as investors and the majority of them have been very beneficial. Mutual funds are a commonality in our current financial marketplace and represent a large amount of the investment dollars in the markets. The markets will provide excellent long-term results for investors who hire an advisor who is knowledgeable and will take the necessary time to do the following: determine their objectives and risk tolerance, develop an appropriate mutual fund for each asset class and review their investment strategies annually. Owen J. Fisher, CFP® is the founder and managing partner of Wealth Navigation™. For more information go to www.wealthnavigation.com or email at info@wealthnavigation.com. Wealth Navigation, LLC is a Registered Investment Advisor and Insurance Agency. “Securities offered through The Private Consulting Group, Inc. . Member FINRA, SIPC.”
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