Mutual Fund Comparison Tools
Mutual funds are portfolios of investment capital directed by professional fund managers. A good mutual fund is a solid choice for beginning investors who may have limited funds. Many funds require an initial commitment of around $1,000 and allow you to add money in increments of $100 (sometimes less). There are a variety of free online mutual fund comparison tools that you may use to screen funds. To use them effectively, you'll need an understanding of the basic measures they use. Online tools are a great time-saver, but ultimately your primary mutual fund comparison tool will be the fund prospectus, a document that contains most of the information you need to make an informed investment decision.
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Online Tools
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Some Internet-based mutual fund comparison tools are very basic. For example, the Mutual Fund Compare tool provided by T. Rowe Price gives you a brief summary of up to five mutual funds when you enter the fund symbols. Others, such as Morningstar's Mutual Fund Comparison Tool, are sophisticated software packages you can use to extract complex information and create customized fund rankings. This type of mutual fund comparison tool allows you to quickly screen large numbers of mutual funds and provides up-to-date performance figures. They should not be used exclusively as a means of deciding which funds you should invest in.
Prospectuses
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A mutual fund prospectus is a U.S. Securities and Exchange Commission-mandated disclosure of a fund's important features. It provides the fund's 1-, 5- and 10-year performance histories. A complete fee schedule is included with the terms and conditions of the fund. The prospectus also describes the fund management and investment strategy. Most funds make their prospectus available online. One thing to keep in mind is that a prospectus is updated only once a year, so using it in conjunction with online tools that have current data is advisable.
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Performance
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Your chief concern when comparing mutual funds is the return you can expect on your investment. An online mutual fund comparison tool will give you year-to-date performance data. This should be combined with the historical information in a fund prospectus to determine if short-term results are consistent with the long-term track record. Pay particular attention to the time frame. Nearly all funds show good performance during bull markets. The best funds continue to gain or at least hold their value during economic downturns better than other funds.
Expense Ratios
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All mutual funds charge fees to pay manager salaries, administrative costs and other expenditures. The expense ratio is the proportion of the mutual fund's assets that go to pay operating costs each year. All else being equal, a low expense ratio is a plus. However, be prepared to accept higher fees if the fund's performance record justifies the extra cost.
Considerations
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When you are using any type of mutual fund comparison tool, be sure to compare similar funds. For example, it makes little sense to compare a growth equity fund with a bond fund designed to produce income rather than growth. Online tools are invaluable for screening mutual funds and getting timely performance data. Before you invest, use the fund prospectuses to gain in-depth knowledge of the funds you find before making a final investment decision.
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