Comparing Different Funds

Once you identify the types of funds that interest you, it is time to look at particular funds in those categories.

Past Performance

A fund's past performance is not as important as you might think. Advertisements, rankings, and ratings tell you how well a fund has performed in the past. But studies show that the future is often different. This year's “number one” fund can easily become next year's below average fund. (NOTE: Although past performance is not a reliable indicator of future performance, volatility of past returns is a good indicator of a fund's future volatility).

Tips For Comparing Performance

Check the fund's total return. You will find it in the Financial Highlights, near the front of the prospectus. Total return measures increases and decreases in the value of your investment over time, after subtracting costs.
See how total return has varied over the years. The Financial Highlights in the prospectus show yearly total return for the most recent 10-year period. An impressive 10-year total return may be based on one spectacular year followed by many average years. Looking at year-to-year changes in total return is a good way to see how stable the fund's returns have been.

Comparing Costs

Costs are important because they lower your returns. A fund that has a sales load and high expenses will have to perform better than a low-cost fund, just to stay even with the low-cost fund.

Find the fee table near the front of the fund's prospectus, where the fund's costs are laid out. You can use the fee table to compare the costs of different funds. The fee table breaks costs into two main categories:

sales loads and transaction fees (paid when you buy, sell, or exchange your shares), and
ongoing expenses (paid while you remain invested in the fund).

Tips on Comparing Costs

Beware of a salesperson who tells you, “This is just like a no-load fund.” Even if there is no front-end load, check the fee table in the prospectus to see what other loads or fees you may have to pay.
Check the fee table to see if any part of a fund's fees or expenses have been waived. If so, the fees and expenses may increase suddenly when the waiver ends (the part of the prospectus after the fee table will tell you how much).
Many funds allow you to exchange your shares of another fund managed by the same adviser. The first part of the fee table will tell you if there is an exchange fee.

Sales Loads

No-Load funds do not charge sales loads. When you buy no-load funds, you make your own choices, without the assistance of a financial professional. There are no-load funds in every major fund category. Even no-load funds have ongoing expenses, however, such as management fees.

When a mutual fund charges a sales-load, it usually pays for commissions to people who sell the fund's shares to you, as well as other marketing costs. Sales loads buy you a broker's services and advice; they do not ensure superior performance. In fact, funds that charge sales loads have not performed better on average (ignoring the loads) than those that do not charge sales loads.

Ongoing Expenses

The second part of the fee table tells you the kinds of ongoing expenses you will pay while you remain invested in the fund. The table shows expenses as a percentage of the fund's assets, generally for the most recent fiscal year. Here, the table will tell you the management fee (which pays for managing the fund's portfolio), along with any other fees and expenses.

High expenses do not assure superior performance. Higher expense funds do not, on average, perform better than lower expense funds. But there may be circumstances in which you decide it is appropriate for you to pay higher expenses. For example, you can expect to pay higher expenses for certain types of funds that require extra work by its managers, such as international stock funds, which require sophisticated research. You may also pay higher expenses for funds that provide special services, like toll-free numbers, check-writing, and automatic investment programs.

A difference in expenses that may look small to you can make a big difference in the value of your investment over time. Example: Say you invest $1,000 in a fund. Assume that you receive a flat rate of return of 5% before expenses. If the fund has expenses of 1.5%, after 20 years you would end up with roughly $2,410. If the fund has expenses of 0.5%, you would end up with more than $2,410. This is a 22% difference.

Additional Sources of Information

Read the sections of the prospectus that discuss the risks, investment goals, and investment policies of any fund that you are considering. Funds of the same type can have significantly different risks, objectives, and policies.

All mutual funds must prepare a Statement of Additional Information (SAI, also called Part B of the prospectus). It explains a fund's operations in greater detail than the prospectus. If you ask, the fund must send you an SAI.

You can get a clearer picture of a fund's investment goals and policies by reading its annual and semi-annual reports to shareholders.

You can also research funds at most libraries. Helpful resources include fund investment books, investor magazines, and newspapers. The fund companies themselves can also provide information.

ABC's of Mutual Funds

Terms To Know