The cost of operating a fund, reflected as a percentage, is called its expense ratio. The lower the expense ratio, the better. Research has shown that low-cost funds that aim for steady growth over time deliver the biggest returns to investors.
Every mutual fund has its own philosophy. Read the fund’s prospectus to understand how it aims to make money, diversify and adjust for risk over time. Look for information on the fund’s benchmark, which is how you know if your fund manager is doing a good job keeping pace with its goals.
MEASURE FUND PERFORMANCE
In general, a fund’s total returns are expressed by its net asset value (NAV) over periods of 1, 3, 5, 10, 15 or since inception. The NAV is a daily calculation of the fund’s market value, minus its operating costs, divided by the current number of issued shares.
(You can find these ratings online by searching for the fund name or its symbol. For example, the symbol for the Vanguard Capital Opportunity Fund is VHCOX.)
Historical performance is no guarantee of future returns, but it’s a starting point when you are researching an investment.
Look for low-cost funds that have been around at least 3-5 years. The 10-year markers show long-term performance, but the year-to-year fluctuations show how consistent — or not — the returns have been.
KNOW THE BENCHMARKS
Common benchmarks include the Standard & Poor’s 500 (S&P 500), which includes stocks from 500 large U.S. companies, and the Dow Jones Industrial Average, which is the average of 30 major stocks, such as Microsoft, Apple, Wal-Mart, General Electric and the Walt Disney Company.
The Dow and the S&P 500 can show how well the overall stock market is doing, but you can’t invest in an index — it’s a marker, more like a pace car, rather than a destination. However, you can invest in funds that mimic the index.