Comparison of Mutual Fund Performance

A comparison of mutual funds should begin with a filtering process.

Mutual funds have grown so numerous that there are now more mutual funds than individual stocks available for purchase. With such a large sample size, by definition some funds will be superior performers, some will be average, and some will be inferior performers. To help choose the right fund, you need to understand how to compare mutual funds.

Asset Class

An asset class is the type of investment that a fund purchases. Although there are many thousands of mutual funds, there are only a few major asset classes, such as stocks, bonds, and money markets. You should begin your mutual fund comparison by narrowing your choices down to funds within the same asset class.

Investment Objective

An investment objective is the goal that a fund is trying to achieve for its investors. Although there are only a handful of asset classes, there are numerous investment objectives. For example, stock funds can be aggressive growth funds, value funds, or country-specific funds; bond funds can invest in anything from high-grade U.S. Treasury bonds to speculative high-yield or "junk" bonds. When you are filtering out mutual funds for comparison, you should stick to funds with a similar investment objective.

Risk Level

Although stock funds tend to be riskier than bond funds, and bond funds tend to be riskier than money market funds, each fund has a risk level that might or might not be indicative of the fund's asset class and investment objective. The specific securities that a fund manager purchases, the frequency of those purchases, and the leverage a manager uses to purchase his securities all contribute to the overall risk profile of a fund. That risk profile must be considered when you are comparing mutual funds.

Fees and Expenses

Some mutual funds charge commissions, or "loads," on either the purchase or the sale of a mutual fund. All mutual funds have internal expenses, such as management fees and marketing expenses, that are expressed as an expense ratio, or a percentage of every dollar that is paid to management. All of these expenses come right out of your pocket and diminish your overall return. Fees vary widely from fund to fund, and they should be considered as part of your comparison.

Compare All Relevant Data

Once you have filtered your mutual funds out by asset class, investment objective, risk tolerance, and fees and expenses, you are ready to compare the net performance of funds that match in these other categories. Use a reliable website, such as the Financial Industry Regulatory Authority's Fund Analyzer, to compare performance data of the selected funds. You should compare both short-term and long-term performance, over a number of market cycles, to see how the funds perform in both good and bad markets.

Consider Your Portfolio

There are no absolute answers when it comes to fund performance, as different investors have different needs and risk tolerances. Some investors seek conservative income, some seek absolute stock performance, and some are in between. Take a look at your overall portfolio and consider how a specific mutual fund will fit in with the rest of your investments.

References

• SEC.gov: An Introduction to Mutual Funds
• FINRA.org: Mutual Funds
• FINRA.org: Fund Analyzer