Make us your home page

4 characteristics of the best mutual funds

Before you invest in a mutual fund, you need to know more about it than simply whether it appeared on a best mutual funds list. Although some of the funds that make these lists are undoubtedly good, using them as the sole basis to pick the mutual funds that you will invest in is a mistake. Many best-of lists feature the top-performing funds over a short or specified period of time. To find mutual funds that have a chance to be top performers over the long run, you need to dig a bit deeper.

In recent years, index mutual funds that passively mimic the performance of market benchmarks like the Standard & Poor's 500 index have gained in popularity because of their low costs, their investing style and, in many cases, the fact that they outperform many actively managed funds in the same fund category. To choose a mutual fund that is not just popular but also has a better chance of producing long-term results for your portfolio, assess it in terms of the following four characteristics that the best-performing mutual funds have in common.

Low expenses

For any investment vehicle, there are some factors within your control and some that are not. An example of a factor that you cannot control is the direction of the stock market. A key factor that you can control is knowing the expense ratio of the mutual funds that you choose to invest in.

A 2010 study by independent investment research firm Morningstar showed the impact of low expenses in fund performance to be quite significant. In every mutual fund investment category studied, the lowest-cost quintile of funds outperformed the highest-cost quintile by a decent margin.

Similarly, a Vanguard study showed the impact of differing levels of annual fees on a hypothetical $100,000 initial account balance over 30 years with a yearly return of 6 percent. After 30 years, the balance in the account would be:

• $574,349 with no mutual fund expenses

• $532,899 with mutual fund expenses of 0.25 percent

• $438,976 with mutual fund expenses of 0.90 percent

When assessing mutual funds, consider prioritizing funds with low or no expenses because they can potentially perform better for you in the long run.

Strong fund management

One of Morningstar's key tenets in ranking of mutual funds is a strong manager or management team. Beyond just the fund manager, top mutual funds also have a solid group of analysts who research the stocks or other investments bought and sold by the fund managers. Additionally, traders help make sure that the fund trades are properly executed. Even for index funds, the underlying manager can have an impact.

A manager change in a mutual fund that you hold should be viewed as a huge red flag, and you should watch the fund closely. Learn as much as you can about the new manager and find out if he or she will be changing the investment process or other factors that have made the fund a success in the past.

Consistent process

You need to fully understand the costs and the investment strategy of any mutual fund before you invest in it. For actively managed funds, look at the fund's investment process. Consider the following questions:

• Is the fund consistent?

• Does it differentiate the fund from its benchmark index?

• What makes it different from other funds (in a positive fashion)?

• Is this process sustainable year in and year out?

It is important that you are able to understand the fund's investment process and why this process is presumably better than other investment options available to you. If you can't answer the question "Why should I invest my money here?" then the answer is that you probably shouldn't.

Strong parent company

Running a mutual fund is a complex proposition that requires more than just a skilled manager to be successful. Having a strong parent company can help with the recruitment of talented support staff. A strong, ethical parent company can set the tone for all of its funds in terms of stewardship.

A 2014 report by Morningstar named four fund families as the recipients of its top stewardship grades — Vanguard, T. Rowe Price, Dodge & Cox, and American Funds — noting that they also had been successful in terms of Morningstar's success and risk-adjusted success ratios.

4 characteristics of the best mutual funds 05/29/16 [Last modified: Sunday, May 29, 2016 6:51pm]
Photo reprints | Article reprints

© 2017 Tampa Bay Times


Join the discussion: Click to view comments, add yours

  1. Trigaux: No more VinikVille as Water Street Tampa finally arrives


    Adios, VinikVille! Hello Water Street Tampa.

    An aerial rendering of the $3 billion redevelopment project that Jeff Vinik and Strategic Property Partners plan on 50-plus acres around Amalie Arena.
[Rendering courtesy of Strategic Property Partners]
  2. Unlicensed contractor accused of faking death triggers policy change at Pinellas construction licensing board

    Local Government

    The unlicensed contractor accused of faking his death to avoid angry homeowners has triggered an immediate change in policy at the Pinellas County Construction Licensing Board.

    Last year Glenn and Judith Holland said they paid a contractor thousands of dollars to renovate their future retirement home in Seminole. But when they tried to move in on Dec. 14, they said the home was in shambles and uninhabitable. They sent a text message to contractor Marc Anthony Perez at 12:36 p.m. looking for answers. Fourteen minutes later, they got back this text: "This is Marc's daughter, dad passed away on the 7th of December in a car accident. Sorry." Turns out Perez was still alive. Now the Hollands are suing him in Pinellas-Pasco circuit court. [LARA CERRI   |   Times]
  3. SeaWorld shares drop Monday to 2017 low after disclosure of federal subpoena


    The Orlando parent company of SeaWorld and Busch Gardens theme parks saw its stock drop 3.5 percent Monday to $15.10, its lowest price of this year.

    Killer whales perform at Shamu Stadium at SeaWorld in Orlando in 2011, before public pressure was placed on the theme park company to curtail its orca shows.SeaWorld has since announced an end to the traditional killer whale entertainment  at its theme parks. [AP Photo/Phelan M. Ebenhack]
  4. Rick Scott appoints longtime ally Jimmy Patronis as Florida CFO

    State Roundup
    Rick Scott appoints Jimmy Patronis (background) as CFO. [STEVE BOUSQUET | Tampa Bay Times]
  5. Local gas prices plummet as Fourth of July holiday travel approaches


    TAMPA — Local gas prices are enjoying an unseasonal dip around the $2 mark just in time for the hectic Fourth of July holiday travel weekend.

    The price of regular unleaded gasoline has dropped to $1.99 at a Rally station on Pasadena Ave. South and Gulfport Boulevard South, South Pasadena.
[SCOTT KEELER   |   Times]