If you want to choose the best mutual funds, there are only a few simple things to know. After identifying your investment objective (growth, income, or both) and tolerance for risk, you're ready to begin building a portfolio. Fortunately, the two greatest strengths of mutual funds are their accessibility and simplicity: They are both easy to buy and easy to understand.
Use a Good Fund Screener
Before you begin looking for the best mutual funds, you'll need a good tool to help you do your research. There are several different mutual fund research sites you can use to find the best funds. You can locate and choose all of the usual mutual fund selection criteria with Morningstar's Basic Fund Screener. This fund screener is free if you sign up for the basic membership.
Use the Appropriate Benchmark for Measuring Performance
To choose the best mutual funds, you'll need to know how to judge performance. Compare each fund's historical returns to an appropriate benchmark, such as the average for funds in the same category or an index. For example, performance for most U.S. large-cap stock mutual funds is compared to the S&P 500 Index.
Keep in mind that mutual funds are best used for long-term investing: more than three years. Put the heaviest weight in your selection criteria on the five-year return. Also, look at the 10-year return if the fund has been around that long. If the fund outperforms the benchmark for five-year return, keep it on your radar. If it doesn't, remove it from your search.
Check Length of Manager Tenure
Many investors overlook manager tenure, which is how long the manager has been overseeing the fund. Look for a tenure of at least three years, and be sure the return time frame you are reviewing represents the same time frame the manager has been at the helm of the fund. If, for example, you've found a fund that has a great five-year return, but the manager tenure is only one year, it means the current manager receives no credit for four of the past five years of performance.
Keep Fees and Expenses Low
Fees and expenses are a direct drag on investment returns. That means funds with low fees and expenses tend to perform better over long periods of time than those with higher relative expenses.
Note
The average expense ratio for stock funds in 2020 was 0.50%.
Consider only mutual funds with a low expense ratio. And avoid sales charges (loads) by buying only no-load funds.
Look for Low Turnover
Turnover is a measure of a fund's trading activity: how often the manager is buying and selling the stock or bond holdings in the fund. Turnover is often expressed as a percentage, called the turnover ratio. A low turnover ratio (20% to 30%), which is generally better for investors, indicates a buy-and-hold strategy and low trading costs. A high turnover ratio (more than 100%) indicates a lot of buying and selling of securities, which results in higher relative trading costs.
Check the Number of Holdings
By nature, mutual funds are diverse investments; they hold dozens or hundreds of stocks and/or bonds all in one basket. To make sure a fund is diversified enough, you should look for the number of securities it holds at a given time. If, for example, a fund is invested in only 20 stocks, there is an increased risk of high volatility: sharp swings up or down in price.
For proper diversification and lower relative risk, check to be sure that the fund has at least 50 holdings before you buy shares.
A Quick Tip on Index Funds
The previous tips apply more to mutual funds that are actively managed, which means that the fund manager is trying to outperform the broad market return, as measured by an index such as the S&P 500. However, over long periods of time, especially five years or more, the majority of actively managed funds do not outperform their benchmark, which is why many investors like to buy shares of index funds instead. These funds seek to track, not exceed, the performance of their benchmark. Because they are passively managed and require less work from their managers, their expenses should be lower than those for actively managed funds.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circ*mstances does this information represent a recommendation to buy or sell securities.
FAQs
Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).
What is the 75 5 10 rule for mutual funds? ›
A 75-5-10 diversified management investment company will have 75% of its assets in other issuers and cash, no more than 5% of assets in any one company, and no more than 10% ownership of any company's outstanding voting stock.
How to choose a good mutual fund? ›
To choose a mutual fund, define your investment objectives (e.g., retirement, education, wealth creation), choose a fund category (equity, debt, hybrid) based on your risk appetite, and evaluate historical returns, expense ratios, and fund managers. Which is the safest mutual fund?
What is the 20 25 rule for mutual funds? ›
The 20/25 rule for mutual funds is a simple and effective way to diversify your portfolio and reduce your risk. It states that you should invest in no more than 20 mutual funds and no more than 25% of your portfolio in any one fund.
What is 15 15 30 rule in mutual funds? ›
Also Read | PSU mutual funds lose 3% in one month. What should investors do? According to the Rule 15*15*30, investing Rs 15,000 each month with a 15% return for 30 years can help in achieving long-term financial goals.
What is the 80 20 rule in mutual funds? ›
You can apply the 80-20 rule by investing 80% of your portfolio in hybrid mutual funds that invest in a mix of equity and debt securities, and 20%in liquid mutual funds that can provide liquidity and safety.
What if I invest $10,000 every month in mutual funds? ›
How much Return Rs.10000 would create in 30 Years? If you invest Rs.10000 per month through SIP for 30 years at an annual expected rate of return of 11%, then you will receive Rs.2,83,02,278 at maturity.
What if I invest $5,000 in mutual funds for 5 years? ›
The SIP calculator will show that after investing Rs. 5,000 per month for 5 years at a 12% annual return, you will receive a final amount of Rs. 4,12,432. Be aware that the total amount you invested over 5 years is Rs. 3,00,000.
What is the 30 day wash rule for mutual funds? ›
A wash sale occurs when an investor sells an asset for a loss but repurchases it within 30 days. The wash-sale rule applies to stocks, bonds, mutual funds, ETFs, options and futures but not yet to cryptocurrency.
What is the best mutual fund to be in? ›
9 Best Mutual Funds to Buy Now
MUTUAL FUND | ASSETS UNDER MANAGEMENT | EXPENSE RATIO |
---|
Fidelity ZERO International Index (FZILX) | $4.2 billion | 0% |
Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) | $138.6 billion | 0.05% |
Dodge & Cox Income Fund (DODIX) | $78.8 billion | 0.41% |
American Funds Bond Fund of America (ABNDX) | $85.8 billion | 0.62% |
5 more rowsJul 30, 2024
To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.
What is the best mutual fund to invest in in 2024? ›
Best-performing U.S. equity mutual funds
Ticker | Name | 5-Year Return (%) |
---|
FSBDX | Fidelity Series Blue Chip Growth | 21.03 |
SCIOX | Columbia Seligman Tech & Info Adv | 21.02 |
FBGRX | Fidelity Blue Chip Growth | 20.25 |
Source: Morningstar. Data is current as of Aug. 2, 2024, and is intended for informational purposes only, not for trading purposes. |
4 more rowsAug 2, 2024
What if I invest $1,000 a month in mutual funds for 20 years? ›
Mid Cap Mutual Fund:- If you invest Rs 1000/per month for 20 yrs in Mid cap mutual fund, Assuming that 15–16 % interest rate. You will have approx 15–16 lakhs.In long term all mutual funds are safe.
What is the 4% rule for mutual funds? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
What if I invest 20000 a month in mutual funds for 5 years? ›
By investing 20,000 per month, in one year your invested amount will be approx. 2,40,000 and in 5 years your invested amount will be 1,200,000. So, during in this 5years if we expect the rate of return of 12%, estimated returns what we get is approx. 4,49,727.
What if I invest $1,000 per month in mutual funds? ›
Take for example you want to invest Rs. 1,000 per month for 12 months at a periodic rate of interest of 12%. which gives Rs 12,809 Rs approximately in a year. The rate of interest on a SIP will differ as per market conditions. It may increase or decrease, which will change the estimated returns.