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How to select
a mutual fund
Author: Tony Reed
One of the most
common ways of selecting a mutual fund is
to invest with the crowd in today's hot
funds. Unfortunately, jumping from one winning
fund to another is a recipe for disaster.
The mutual funds that the crowd follows
typically have had a hot recent performance
and tend to gather all the new mutual fund
sales.
Investors as
a whole are primarily allocating their new
investments to a small number of mutual
funds and to a smaller number of mutual
fund companies. Investors have invested
over $400 billion in the 2843 different
mutual funds, but one-third of those assets
are invested in only 50 of those funds and
one-half of those assets are invested in
the largest 100 funds.
There are benefits
to following the market leaders. Larger
mutual fund companies and larger funds have
the ability to reduce costs and attract
the best professional money managers. However,
the biggest limitation is that today's better-selling
mutual fund may not be tomorrow's winner.
This is true for any mutual fund but it
seems to plague the best seller, and the
one that garners the most attention, the
most often.
So buying the
equity fund that was yesterday's best-seller
isn't a strategy that produces excellent
returns. You do not have to go fully in
the opposite direction and ignore these
hot funds, but you should understand their
limitations and strengths. They became best-selling
funds because they have merit, but you have
to access that merit within your own well-diversified
portfolio, and not the crowd's current investment
trend.
About the author:
Tony Reed is the author of " How to
select a mutual fund", please visit
his website Mutual
Funds & Stock Trading for more information. |
