How to Evaluate a Mutual Fund

There are many factors to consider when choosing a mutual fund. This article breaks down some of the technical indicators that should be evaluated by investors seeking a fund that matches their needs.

Instructions

Difficulty: Moderate

Things You’ll Need:

• A Morningstar or CDA Wiesenberger report, if possible

1. There are several technical indicators that measure a mutual fund's performance such as alpha, beta, taxes and fees. Knowing what these indicators mean can greatly aid mutual fund investors in constructing their portfolios.
2. One of the first and most obvious indicators that potential investors should consider when choosing a fund is the fund's inception date. A mutual fund that has survived a real bear market has an advantage over a new fund that has existed for perhaps only a few years in fair-weather conditions.
3. Another important indicator to look at is Jensen's Alpha. This number essentially indicates the amount of value that the fund's portfolio management adds or detracts from the return of the overall market. For exemple, a positive alpha figure means that the fund's managers have outperformed the market, while a negative number obviously connotes the opposite. Therefore, a mutual fund with a negative alpha number should be viewed with suspicion.
4. Another key factor to evaluate is a fund's beta. This number is a mathematical measure of a fund's price volatility. The market at large is considered to have a beta of 1. Therefore, if a mutual fund has a beta of 2, it means that the fund will increase twice as much in price as the market in a bull market and fall twice as far in adverse conditions.

Tips & Warnings

• For more information on mutual funds, go to morningstar.com (see link in Resources below).
• This article is intended to be purely educational and should not be construed as investment advice. For further information on which type of mutual fund is right for you, consult your financial or investment advisor.