Answers About Mutual Fund Performance

by Alan Lavine and Gail Liberman

Despite all the adverse media publicity about mutual funds lately, there are still diehard mutual fund investors as well as good funds to invest in. Here are answers to some frequently-asked mutual fund questions.  

• Does the size of a fund matter when it comes to investing in a mutual fund? Yes and no. If you invest in a large company stock fund that tracks the stock market averages, the answer probably is no. Size matters, however, when you invest in small company stock funds. Funds with assets of $100 million or $200 million have greater flexibility to move in and out of stocks without driving the price of that stock up or down. These funds can move quickly to take advantage of opportunities.
• Is it better to look at a fund’s annual rate of return or factor the returns for several years and compare cumulative returns? You should do both. The fund’s annual return is based on two things—the dividend yield on the fund plus the price gain or loss in the share price. You can look at a fund’s annual rate of return over one year, three-year, five-year and 10-year periods. The cumulative return will tell how much you made or lost overall. But you should also look at how the fund performs each year compared with other funds of its type in both up and down markets. You can get all this information from www.Morningstar.com.
• Is it best to avoid a fund that lets market timers move in and out of the fund for profits? Yes. The bad thing about market timing is that it increases a fund's expenses. Plus timing disrupts a fund manager’s buy-and-sell decisions. So it pays to check with a fund group about its policy regarding market timing.
• How much do fund expenses affect a fund’s return? Unlike bank accounts which charge flat fees, mutual funds deduct expenses from a fund's earnings. Then you get paid.  Index funds typically charge between one-quarter and one-half of one percent of assets in annual expenses. By contrast, the average stock fund charges almost 1½ percent of assets annually. So an actively managed stock fund typically needs to make at least 1 percentage point more than the stock market index just to do as well as an index fund.

Can a financial adviser increase the performance of my investment? Don’t expect a financial adviser to perform miracles. If he or she promises you fat returns, look elsewhere. A good financial adviser can help you lose less money on the downside. Plus, he or she can set up investments, so you get the best possible return by taking the least amount of risk.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.