Top Mutual Fund Investment

This article discusses top mutual fund investment. Key question: How do you chose the right equity fund out of the hundreds available? How do you know what kind of risk you are taking?
To choose a fund:
Determine your goals. Decide if you are in for the short term (a year or two, because you would like to make a profit and buy a house) or for the longer term (awaiting retirement).
Use comparative fund listings (like those charted at the end of the Wiesenberger Report) to identify which funds have performed best over the past 20-, 15-, 10-, and 5-year periods. The charts make it simple to pick out the funds that have performed best.

Research the performance of the best funds by comparing an individual fund's performance for the past years with the performance of the Dow Jones industrial average and the Standard & Poors Index for those years. Example: If the Dow is up 20% and the fund is up 50 %, the fund is likely to do well in an up market. (Its record should be fairly consistent and its management stable.) If the Dow in a number of years is down, and the fund is down much more, it usually means the fund is a high risk in a down market. See mutual fund for more information.

To maximize dollars for the short term:
• Pick a high-risk speculative fund that tends to do extraordinarily well in an up market.
• Invest in more than one.
• To make more (and risk more), borrow money against your mutual fund shares to leverage your investment. This type of investing requires a good sense of market timing to determine when to take profits. While you may be able to make substantial profits on your leveraged investment, you are betting that the fund will appreciate more than interest rates. If the market starts falling, you will have to take a beating.
For a long-term investment in a mutual fund: Look at the record of funds that have done well in up markets and have conserved their capital in down markets. Use Wiesenberger to track individual years. Choose good performers that went down no more than the Dow in poor years.

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Open-end versus closed-end funds: With an open-end fund, you have a guaranty that the fund will buy back your shares at whatever market value they are worth. This gives you both liquidity and an element of security. In a closed-end fund, there are a finite number of shares traded on the open market. They may sell for less than their underlying asset value if there is little demand. There is more risk with a closed-end fund when it comes time to take your profit.
Load versus no-load: Load funds charge a sales commission up to 8 Yz % when you purchase them. No-loads do not. Both charge management fees. No-loads are attracting most of the money these days. The record shows no performance difference between the two.

Management: Look for a fund with consistent management. A parent company that is financially strong can attract better managers and has the ability to keep them. Make sure the fund's manager is the same one who was with the fund last year and the year before, assuming the record is good.
Look at a fund with a family. It may be convenient to use a fund that has other types of funds in-house. Examples: Tax-free funds, bond funds, money-market funds. Reason: An investor doesn't know where the stock market, bond market, or money market will be five years from now. Although you can always switch funds on your own, it's more convenient to switch by just making a telephone call.

Look at the total net assets of the fund. It may be a factor in profitability. Smaller funds are likely to outperform large ones. Reason: If managers have a large amount of money to invest, they are not going to take a position in a small company even if it is a very attractive one. Why: Tracking it is too time consuming and will not be significant in the fund's earnings. Also, if a company turns sour, it's hard for a large fund to sell so much stock quickly without forcing down the price. Probable limit: $500 million in assets. Better: Less.
Watch the redemption rate of the funds.
That's the rate at which people are withdrawing their money. Reason to keep alert: If a fund is having massive redemptions, its management is having problems. Worse: The fund now is being forced to liquidate positions for cash to meet redemptions, which complicates its problems.

Funds where there are huge fluctuations of assets may signal a problem. They may be flooded with money at times by pension-fund managers and overseas money managers who play the US. stock market through no-load mutual funds. Trap: When the mutual fund manager has to redeem these positions quickly, it will hurt the performance of the fund, and therefore your investment.

Mutual Funds' Performance: Check mutual funds' performance over a period of years, including both up and down markets. Be wary of bond funds' figures. Since there's no standard method of calculating yields, each fund uses whatever system makes it look best. Also be wary of government securities fund advertising, which suggests the government "guarantees" the fund's yield. Bonds themselves may be guaranteed, but prices fluctuate with the interest rate.

Source: Consumer Information Center

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