QuickTips: Smart Stock & Bond Mutual Fund Strategies

Map out your investment plan. Before you embark on your search for a mutual fund, take a step back and make sure you’ve thought out your overall investment plan. Once you’ve determined what type of investments are appropriate for your needs, you’re ready to begin your search for specific funds that fit your plan.

Do your homework. Even if you have a financial representative helping you select mutual funds, you should still be an informed investor. As a starting point, review some of the independent sources of general mutual fund information. All the major personal finance and consumer publications cover mutual funds, including The Wall St. Journal, Money Magazine, Kiplingers, Business Week, Barrons, Forbes, Fortune, Smart Money, and Consumer Reports. Most of these publications also publish special periodic mutual fund ranking and information guides.

Next, get more detailed information on the funds you’re considering from one of the major fund reporting services, such as Morningstar, Value Line, Standard & Poor’s, or CDA/Wiesenberger . You can get these reports online, by subscription, at the library, or from your financial representative. These reports contain essential information including historical performance results, portfolio holdings, investment management details, expense breakdowns, and in some cases, commentary on a fund’s history, strategies, and management.

Review fund company information. Before you invest in any mutual fund, review the prospectus. Sales representatives are allowed to deliver a fund prospectus after your purchase, but be sure to ask for a copy up-front. At a minimum, review the essential information including the fund’s:

• investment objectives

• expenses

• financial history and past performance

• investment methods, management information, and manager tenure

• risk level and volatility

• minimum initial investment and subsequent investment requirements

Prior to investing, ask for the most recent copies of the semi-annual or annual shareholder reports for information on a fund’s portfolio, performance, and investment goals and policies. If you still want more details, request the Statement of Additional Information for supplemental information about a fund’s strategies and techniques.

Understand the expenses. All fund prospectuses have a fee table at the front that makes it easy to compare fund costs. There are two kinds of mutual fund fees: Transaction expenses that you pay directly when you buy or sell fund shares, and annual operating expenses of the fund itself that aren’t charged directly to you, but are deducted from a fund’s assets before its earnings are distributed to you. Remember that it’s the combination of expenses over time that affect your return, not any particular kind of fee.

Also, since some funds have several classes of shares available, make sure you ask about all the options so you can choose which ones best suit your needs. For example, a fund may have A,B, C, or D shares, each charging a different combination of sales charges and annual operating expenses. Pay attention to the asterisks too - they may indicate that the fund is temporarily waiving a portion of its operating expenses.

Review past performance. To measure a fund’s performance, look at its total return. This is the change in the value of an investment in the fund over a specified period of time. It includes any changes in the fund’s share price, as well as any investment earnings, assuming that any earnings were reinvested. Compare a fund’s total returns with the returns of similar funds over the same time periods, as well as the appropriate benchmark market index. For example, compare large-company funds with similar funds, as well as with the S&P 500 index. And compare small-cap funds with other funds in its category, as well as the Russell 2000 index.

To gauge a fund’s performance through different economic cycles and over time, focus on its long-term record – ideally five to ten years if it’s been around that long. Also look at a fund’s actual annual returns to see how it has performed year-to-year compared to its benchmark and to other similar funds. Keep in mind that a fund’s past performance is no guarantee of its future performance, especially if its investment strategies have changed because it has ballooned in size, or because it’s under new management.