One of the most common questions potential investors have is "Which is the best mutual fund company?" In today's post I'm going to write about equity mutual funds, funds that invest in the stock market.
The first thing most people look at is the return of the mutual fund. Companies or individuals may tout high returns. Of course, past performance is not a guarantee of future returns but many investors still base their choice of mutual fund company on published returns.
Potential investors should do a little more research before getting excited about high returns. What stocks (if it is an equity fund) did the mutual fund company invest in? Did it invest in any speculative stock? How well did the mutual fund do in the last 5 years? 10 years? How well did the fund do during this period compared to other funds? If it is an equity fund, how well did it do compared to the stock market index?
I personally believe that stock-picking and trying to beat the stock market index is largely a matter of luck. By extension equity mutual funds that outperform the stock market index do so mostly by being lucky. This is not a new idea and it is not the purpose of this post to explain it, but let's assume that it's true. What then are the criteria for choosing the best mutual fund?
If choosing the "right" stocks and beating the index is a matter of luck, then the best fund would be one that invests in stocks that are included in the index. The fund company doesn't have to guess which stocks to invest in, they're listed right there on the index. This means that the fund's performance will mirror that of the stock market's.
Wait, anyone can do that! Since the list of stocks on the index is public information, any investor can buy stock for him or herself. Why pay fees for something that's essentially a "no-brainer"? The number one reason (personally) is convenience. I hear it's not that hard to invest in the stock market directly, but I'm too busy right now to learn it. My second reason is that if I invest directly, I'd be tempted to speculate and try to beat the market. But I'm getting off-track... All other things being equal, the best mutual fund would be the one with the lowest fees. Given that the different funds are equally likely to get lucky, or all of them follow the index, the best fund would be the one that charges their investors the least.
1. If investing in an equity mutual fund, go for an index fund.
2. Find the fund with the lowest fees.
Agree? Disagree? Post a comment!