Things You'll Need:
- Internet Access
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Step 1
Each mutual fund is legally required to provide a prospectus to all potential investors. This document describes in detail the sales commission, if any, as well as the earnings history, a list of the investments in the portfolio and information about the people managing the mutual fund. It is important to read the information provided to find out if the fund suits your needs.
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Step 2
Read the "performance" or "annual total return" section of the prospectus. This section lists the funds value for the last 10 years or for each year the fund has existed. The information shows if the fund has increased or decreased in value over the years. It is legally required that the fund be compared to an industry benchmark such as Standard & Poor's (S&P) 500 for stock funds or other relevant index. You want to find a mutual fund that has consistently outperformed the index over a period of time.
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Step 3
Check the fund's one-year performance. While it is an important measurement of the fund's short-term performance, it does not offer much insight into how well the fund performs over a period of time.
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Step 4
Locate the three-year and five-year average returns. This information tells an investor how well the fund has done in the short term. This is useful information because the in earnings over this period may indicate a trend.
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Step 5
Look at the average annual return for the last 10 years. This is the best information to have. It tells you how the fund has done on average each year. An average return gives you a much better indication about how the fund does in both good and bad economic times. The longer the earnings history for a mutual fund, the better able an investor can predict the future performance of a fund.
