How To Compare Mutual Funds Performance

Mutual funds are one of the best investment opportunities available to all kinds of investors. But how do you compare them when there are so many different varieties of mutual funds available for investment?

There are many mutual fund comparison tools, analyzer and return calculators available online to compare mutual funds performance. But performance comparison is just one of the factors. In this article we will try to find out the answers to below questions.

  • What Is Mutual Fund Investment
  • How Safe It Is To Invest In Mutual Funds
  • How Much Should I Invest In Mutual Funds
  • How Does Investing In Mutual Funds Work
  • What Is The Best Way To Invest In Mutual Funds
  • Why Should I Invest In Mutual Funds
  • How To Compare Mutual Funds Performance
  • How To Invest In Mutual Funds Online
  • What Type Of Mutual Fund Should I Invest In

What Is Mutual Fund Investment

Mutual fund is an investment vehicle which collects the money from different investors and invests in stocks, bonds or other securities with gains and losses shared with investors.

Mutual funds are professionally managed by mutual fund managers who decide on the asset allocation, for which they charge fees known as management fees or investment fees or expense ratio.

How Safe It Is To Invest In Mutual Funds

While no investment is 100% risk free, mutual funds are generally considered very safe. However, they can be safe or unsafe depending upon where, how or why you are investing in them.

You can invest in best performing mutual funds by comparing mutual fund performance and investment returns. Also you can use various portfolio comparison tools available online.

How Much Should I Invest In Mutual Funds

The amount of money you should invest in mutual funds will depend upon your financial goals like buying a car or a house, child’s education, vacation trip or retirement planning.

You can use the online mutual fund investment calculator to calculate your monthly investment. To maximize your investment returns, you can also use expense ratio comparison calculator.

How Does Investing In Mutual Funds Work

Mutual fund companies pool the money from different investors and invest the money in best stocks or bonds or other securities and create a mutual fund portfolio.

This portfolio is managed by mutual fund manager who decides the asset allocation. The NAV of the mutual fund portfolio fluctuates with the price of stocks or bonds present in that portfolio.

What Is The Best Way To Invest In Mutual Funds

Investing in mutual funds requires online research and analysis to find out what mutual funds should you invest in or how to know which mutual fund to invest in.

The best way to choose top performing mutual funds is to check out the performance comparison charts or compare investment returns using various portfolio comparison tools available online.

Why Should I Invest In Mutual Funds

Mutual funds are considered as best investment options for retirement planning and financial goals. There are many advantages of investing in good mutual funds.

  • Diversification
  • Convenience
  • Lower Costs
  • Professional Management
  • Wide Range Of Choices
  • Easily Accessible
  • Liquidity
  • Transparency
  • Automatic Reinvestment
  • Systematic Investing & Withdrawal
  • Performance Track Records
  • Wealth Appreciation

Diversification

Diversification is one of the biggest advantages of mutual funds. Instead of buying individual stocks or bonds, you can invest your money in hundreds of stocks or bonds by buying just one mutual fund.

Convenience

Mutual funds can help you to avoid the complicated decision making process involved in researching individual stocks, determining asset allocation for your portfolio and continuously tracking the markets.

Lower Costs

Trading costs for individual stock or bond traders are very high. The cost per individual is reduced with mutual funds as the cost of trading is spread over all the investors of the mutual fund.

Professional Management

Mutual funds are managed by professional mutual fund managers who have the required skills and knowledge to decide where to invest your money and when to buy and sell your investments.

Wide Range Of Choices

You can choose from different categories of mutual funds depending on your financial goals and investment objective. A young investor can take more risk by investing in stock funds whereas a conservative investor can invest in bond funds to protect his capital and earn a regular income.

Easily Accessible

You can start with a low minimum investment and you can easily buy and sell mutual funds online through banks, investment firms, mutual fund companies, financial planning firms, credit union and trust companies.

Liquidity

Mutual funds are very liquid compared to other investments like real estate. You can easily sell them online and the money will be credited to your brokerage account within few days.

Transparency

Mutual fund prospectus is publicly available on many financial websites. All the information you need to know for investing is available in prospectus. You can also check the stocks or bonds present in mutual fund portfolio.

Automatic Reinvestment

Mutual funds help you to compound the returns by providing automatic reinvestment feature where you can reinvest the capital gains and dividends without any extra load or fees.

Systematic Investing & Withdrawal

Many mutual fund companies provide systematic investing and withdrawal option where you can invest or withdraw your money at regular intervals, like weekly or monthly, without any extra load or fees.

Performance Track Records

All the mutual fund companies are required to maintain the performance track records which are published in popular financial websites and business magazines. There are various tools available online which can help you to compare mutual funds performance.

Wealth Appreciation

For most of the people, the best way to grow wealth is by investing in mutual funds. Saving money and investing in mutual funds is the best option for financial and retirement planning.

How To Compare Mutual Funds Performance

Before investing in mutual funds, you should compare mutual funds performance using below parameters.

  • Investment Objective
  • Time Horizon
  • Risk Tolerance
  • Fees And Expenses
  • Sector Allocation
  • Assets Under Management
  • AMC Track Record
  • Performance Against Benchmark
  • Performance Against Peers
  • Performance Rating And Consistency

Investment Objective

Investment objective depends on what financial goal you want to accomplish by investing in mutual funds. If you are looking for wealth appreciation, you can invest in stock funds. If you are looking for capital protection, you can invest in bond funds.

Time Horizon

How long should you invest in mutual funds? Time horizon refers to the length of time you want to remain invested in mutual fund. Your time horizon can be long term, medium term or short term depending upon your investment objective.

Risk Tolerance

Your risk tolerance depends on the amount of money you can afford to lose. Every mutual fund scheme has an associated risk level which can be low, moderate or high.

Fees And Expenses

How to calculate mutual fund fees? You can use online comparison tool to compare the fees and expense ratio of the mutual fund. Expense ratio can be critical factor when you compare mutual funds as lowest expense ratio mutual fund will increase the mutual fund performance.

Sector Allocation

You can check the sector allocation in the mutual fund prospectus if you are planning to invest in a particular sector. Sector funds invest only in the companies which belong to that sector.

Assets Under Management

AUM refers to the total value of assets managed in the mutual fund scheme. Mutual funds with larger AUM are less vulnerable to multiple redemptions made by investors.

AMC Track Record

It is important to compare the track record of asset management company or the mutual fund company. Also you should compare the track record of the mutual fund manager.

Performance Against Benchmark

You should compare the performance and asset allocation of the mutual fund scheme with the benchmark index which has similar investment objective and asset allocation.

Performance Against Peers

You can compare mutual funds side by side from different mutual fund companies. While comparing they should have similar investment objective and asset allocation.

Performance Rating And Consistency

Best mutual funds are consistent in their performance. Comparing the mutual fund performance and rating for last 3 years or last 5 years can show you how good the mutual fund is.

How To Invest In Mutual Funds Online

After you compare mutual funds, the next step is to know how to invest and manage your mutual funds portfolio.

  • Decide Whether To Go Active Or Passive
  • Calculate Your Budget
  • Decide Where To Buy Mutual Funds
  • Understand The Fees
  • Manage Your Portfolio
  • Invest A Percentage Of Your Income
  • Diversify Your Investment Portfolio
  • Don’t Chase Performance
  • Find A Mutual Fund Advisor
  • Follow Your Wealth-Building Plan

Decide Whether To Go Active Or Passive

Active funds are managed by professionals who try to beat the benchmark index and generate higher returns for investors. Passive funds are best for most investors who charge lower management fees and generate returns similar to benchmark index.

Calculate Your Budget

Deciding about how much money to invest in mutual funds depends on your financial goals and investment objective. If you are closer to retirement, you should allocate large portion of your money in conservative investments which provide regular income.

Decide Where To Buy Mutual Funds

After you compare mutual funds, you can buy mutual funds either directly from mutual fund companies or from financial agents or mutual fund distributors. Mutual fund companies do not charge any commission which helps you to generate higher potential returns on your initial investment.

Understand The Fees

All the mutual fund companies charge fees for managing investor’s money which is known as management fees or expense ratio. With expense ratio comparison you can invest in lowest expense ratio mutual funds and generate higher returns.

Manage Your Portfolio

Your mutual fund portfolio should have best mutual funds as per your investment plan. The best way of achieving this is to rebalance our portfolio once every year by adding best performing mutual funds.

Invest A Percentage Of Your Income

Wealth building requires discipline. You should have an investment plan which is in line with your financial goals. You should decide to invest a certain percentage of your income every month by opting for Systematic Investment Plan and building your wealth gradually.

Diversify Your Investment Portfolio

Investing in balanced funds can help you to diversify your mutual fund portfolio. Diversification helps you to minimize the unknown risks. You can achieve diversification by investing in fixed income funds, growth funds and international funds.

Don’t Chase Performance

When you compare mutual funds, performance is just one of the factor while choosing best mutual funds. You should also focus on asset allocation, management fees, portfolio, sector allocation, turnover ratio, expense ratio and assets under management.

Find A Mutual Fund Advisor

Making an investment decision can be difficult for many people you are not very familiar with financial world. A good investment advisor can help you to create an investment plan and suggest best mutual funds which are in line with your financial goals.

Follow Your Wealth-Building Plan

You should always be aware about how and where your money is invested and how will it help you to reach your long term goals. Make sure your portfolio is well diversified. Check the performance of your portfolio and regularly re-balance your portfolio.

What Type Of Mutual Fund Should I Invest In

In this section we will compare mutual funds on the basis of their classification depending on where they invest, how they invest and what they invest in.

  • Closed End Funds vs Open End Funds
  • Stock Funds vs Bond Funds vs Balanced Funds
  • Regular Funds vs Direct Funds
  • Active Funds vs Index Funds
  • Load Funds vs No Load Funds
  • ETF vs Mutual Funds

Closed End Funds vs Open End Funds

Closed end funds issue fixed number of units when they are launched. Investors are not allowed to redeem the units before the maturity of the fund. Since the closed end fund is not subjected to frequent redemption, portfolio manager can formulate a good investment strategy.

Open end funds can be bought and sold at any time depending upon their NAV. These funds do not have any fixed maturity period. Open end funds are a good option for salaried class as they can invest in the fund via Systematic Investment Plans (SIP).

Stock Funds vs Bond Funds vs Balanced Funds

Stock funds invest in stocks of different companies. They give you higher returns but they also have higher expense ratio. Stock funds are best for people with high risk tolerance.

Bond funds invest in corporate bonds and government treasuries. These funds have lower expense ratio and provide regular income. Bond funds are best for conservative investors.

Balanced funds invest in both, stocks and bonds. The allocation is decided by mutual fund manager. Balanced funds are best for retirement planning as they give wealth appreciation and capital protection.

Regular Funds vs Direct Funds

You can buy regular funds from an intermediary like distributor or agent or broker. These intermediaries charge commission or distribution fees which increase the expenditure of your initial investment and lower your returns.

How to invest in mutual funds without a broker? The answer to this question is by buying mutual funds directly from Asset Management Companies (AMC). There are no intermediaries involved and they do not charge any distribution fees or commissions.

Active Funds vs Index Funds

Active funds have higher expense ratios as they are managed by team of expert analysts and experienced managers who make active investment decisions by using market research and analysis.

Index funds do not require any hands-on management as they follow passive portfolio management strategy by investing in stocks which are part of a benchmark index like S&P 500 or NASDAQ.

Load Funds vs No Load Funds

Load funds charge entry or exit load which reduces your initial investment and lowers your potential returns. No load funds have no load charges which increase your investment returns.

ETF vs Mutual Funds

ETF invest only in the securities which are part of a benchmark index. ETF are similar to index funds but they can be traded on any exchange like stocks.