Mutual Fund Analysis

Many of us are intimidated by the notion of purchasing individual stocks. We don’t want to do the kind of analysis that is required to make an informed purchase in the stock market. In order to forego this process we often turn to mutual funds.

Mutual funds are professionally managed investments. All of the investor’s contributions are invested in stocks, bonds, short term money market and other securities. All of this is managed by a fund manager who is in charge of making investments consistent with the prospectus of the fund. Thus being aware of the strengths and weaknesses of the fund manager is vital before investing in a mutual fund.

Index Funds

Unlike other types of mutual funds, index funds simply seek to match the results of widely known indexes like the S&P 500 or the Nasdaq Composite. In these cases the process of analysis becomes quite a bit simpler. Since the mutual fund is nearly automated, the qualifications of the fund manager become dramatically less relevant. This makes your analysis process considerably simpler.

Why Bother With Actively Managed Funds?

While it’s difficult to say what the returns of actively managed funds are, there is little to suggest that over long periods of time the returns on these funds are dramatically higher than index funds. Additionally, many of the best funds do very well in certain markets and then do extremely poorly in other markets. Thus a 5 year average return of a fund may look very good, but once fundamental market economics change, these funds are suddenly dramatic underperformers.

This eventually leads to a question of why you would bother to invest in actively managed funds. If you are going to have to do the kind of research and monitoring on your fund that you would have to do for individual stocks, it doesn’t seem to be netting you the benefit you initially sought. If you are investing in funds to reduce the amount of time and energy your investments require, why put yourself back in the position of having to do considerable research. This seems particularly compelling, when the average returns for these funds don’t seem to justify the extra research.

Thus oftentimes the best type of mutual fund analysis you can do is to determine which index funds meet your qualifications and then make use of those. You can save yourself time and energy and very likely get comparable returns if not superior ones.