For those just learning to invest or not willing to be actively involved in managing their own portfolio, mutual funds are quite popular.
With some basic research and as little as $25 per month, anyone can get started investing in mutual funds.
The Fund’s Performance Compared to Other Funds
One of the most important (and obvious) factors to consider when looking at mutual funds is performance.
An attractive fund should have a solid performance not only compared to other similar funds but also the market index.
When I’m looking at a potential investment I always look at similar funds with the same objective (or industry) as well as the market index. My thoughts are that there’s no sense investing in a fund that can’t beat the market index since there are several low cost exchange traded funds (ETFs) that closely track the index.
Related: 4 Reasons Why I Like ETFs
XIU (iShares S&P/TSX 60 Index ETF) is an ETF that is made up of 60 of the largest companies within the index. It has a management expense ratio (MER) of 0.18%, which is very reasonable, and it currently yields 2.2%. Since XIU so closely follows the index, I likely wouldn’t be interested in a fund that wasn’t able to beat it’s annual return.
Bottom line – if an actively managed fund can’t beat the index, you’re likely better off with a low-cost index ETF.
Total Costs of Ownership
Fees are a hot topic for mutual fund investors. Canadians pay some of the highest prices in the world, so investors looking to buy funds should have a good handle on the total costs with a fund.
All funds are required to list the fees in the ‘Fund Facts’ document. The management expense ratio is typically a percentage that takes care of the management of the fund. There are also costs associated with buying/selling the funds, so it’s always important to consider the total costs of owning units of a fund.
Along with the MER, there may also be front-load fees (commission charged when buying units of the fund) and deferred sales charges (costs when selling the units).
The Track Record of the Fund Manager
It’s always a good idea to look up the past performance of the fund manager. Have they previously managed other funds that have had solid returns, or do they not have a track record at all?
The mutual fund website should give you the basics on the fund manager’s past performance. You’ll also want to consider the investment style of the fund manager; perhaps they have taken more risks in the past than you are comfortable with.
It’s also worth noting that high turnover within the management of the fund can be a warning sign.
Where to Get More Information
Any decent mutual fund will have an attractive website that highlights the best features of the fund (and leaves out the rest).
It’s up to the investor to dig deeper and find out if the investment is a good one or not.
I usually check with SEDAR (where all the documents mutual funds legally have to file are kept).
One of the most important ones to check out is the ‘Fund Facts’ document. This will tell you:
- What the fund invests in
- Historical performance
- Full listing of all costs
- Tax considerations
Conclusion: mutual funds can be a great place for those just beginning to invest. Like any other type of investment, some basic research is needed to look into past performance, total costs of ownership and the fund management team.