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Comparing mutual funds is fairly simple when you have a good understanding of the key statistics and know how to employ them effectively. The key statistics listed below should serve you well in comparing mutual funds.

rious periods of time will give you a good feel for a fund’s ability to consistently deliver good returns. MMutual Fund Returns

Arithmetic Mean Risk-Adjusted Return

Mutual Fund Risk

Standard Deviation Beta

Risk-to-Return

Sharpe Ratio Coefficient of Variation Treynor Ratio

You’ll find these statistics readily available on the Internet at sites like Yahoo! Finance. These key statistics should be used in the order in which they are listed.

Risk and return should not be used independently to compare mutual funds. Indeed, you need to use one of the measures of risk-to-return to compare mutual funds on a relative basis.

Published annual returns are usually computed by compounding monthly returns and multi-year averages are usually computed as the geometric mean of the annual returns, which yields a compound return and is the metric that will tell you how well you would have done if you had been invested in a fund over the period of interest. However, the arithmetic mean, i.e., a simple average of the annual means, is the appropriate metric for evaluating a mutual fund’s ability to deliver good returns. The returns delivered over various periods of time will give you a good feel for a fund’s ability to consistently deliver good returns. More weight should be given to the longer periods.

The returns published by independent sources should be total returns (they include dividend and capital gains distributions) net of fees and expenses. Be sure to verify this.

In investing, risk is measured in terms of volatility. Total risk is measured by the standard deviation of returns and it is the standard deviation that should be used to compare mutual funds. Beta is a measure of residual risk, i.e., the risk inherent in the overall market. Beta is an indicator of the volatility of a security relative to a broad market index such as the S&P 500.

Although we have a natural aversion to risk, risk is what justifies earning a return in excess of that of riskless securities like T-bills, but expected returns must be commensurate with the level of risk. If two mutual funds have equivalent returns but one has a significantly higher standard deviation, the one with the higher standard deviation should be rejected in favor of the other. If, on the other hand, two mutual funds have equivalent risk-adjusted returns, you may prefer the riskier of the two if you have a high risk tolerance, as it has the potential to deliver higher returns.

The risk-adjusted return is calculated by dividing a fund’s return by its standard deviation then multiplying by the standard deviation of a relevant index. For example, if you are comparing emerging markets stock mutual funds, an appropriate index would be an emerging markets stock index. Using a relevant index rather than the S&P 500 isn’t absolutely necessary but it has the advantage of providing you with the opportunity of comparing the individual funds with the index. If none of the funds you are comparing can beat the index on a risk-adjusted basis, then you should look at some other funds or buy the index.

The final quantitative step in comparing mutual funds is the use of some measure of risk-to-return. Here the Sharpe ratio is the hands-down winner for use in comparing mutual funds, as it is computed using total risk. The coefficient of variation is a quick and dirty substitute for the Sharpe ratio. The Treynor ratio considers the degree of diversification in its computation and is best used for evaluating the competence of funds’ managers.

The Sharpe ratio is the excess return (the actual return less the risk-free rate) divided by the standard deviation. The result is the real return per unit of risk. When comparing similar mutual funds, preference should always be given the one with the highest Sharpe ratio. Choosing one with a slightly lower Sharpe ratio might be appropriate if it displayed a lower degree of correlation with the other securities in your portfolio.

By themselves, the yield and expense ratio won’t tell you a lot, but they should be factored into returns and you should verify that they have been. Yield is a consideration if one of your objectives is to produce a stream of income. Also, in taxable accounts, yield creates a tax liability.

Turnover will affect return to the extent that trading costs eat into returns, but it will always be reflected in the returns. In tax-deferred accounts, turnover that pays its way is not an issue. Turnover is an issue in taxable accounts, as it generates capital gains tax liabilities.

Finally, manager tenure should always be a consideration when evaluating and comparing mutual funds other than index funds. A mutual fund with a good long-term record under the same manager is highly desirable, and there should be a co-manager or fully indoctrinated prot

For those who want to get involved in the stock market, but don’t have sufficient funds to make it worthwhile purchasing just one company`s stock, mutual funds, or unit trusts, can be a good option. Many companies allow the purchasing of these on a monthly basis, thus ‘drip feeding’ the purchases over a period of time.

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it on their behalf. The mutual fund will have a fund manager that trades the pooled money on a regular basis. The term mutual funds is used in the United States and Canada. In the UK, Ireland, Australia and some other countries they are known as unit trusts. For our purposes mutual funds and unit trusts have been to mean virtually the same thing, but note there are some differences, which should be checked at the time of any purchase.

Trusts and OEICs provide a mechanism of investing in a broad selection of shares, thus reducing the risks of investing in individual shares. There are thousands of Unit Trusts and hundreds of OEICs to choose from, so it is important to select the right fund to meet your needs.

Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund’s net asset value. Each time money is invested new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price.

Each Unit Trust has its own investment objective and the fund manager has to invest to achieve this objective. The fund manager will invest the money on behalf of the unit holders (or shareholders). The value of your investment will vary according to the total value of the fund.

The trust manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bid-offer spread. The bid-offer spread varies from company to company, and even from fund to fund within the same company. Market conditions will often dictate the size of the spread, the lower the spread the better for the investor. Some fees are declared as a percentage of your investment, others are built into the price.

Mutual funds, and unit trusts, can invest in many kinds of securities. The most common are cash instruments, stock, gilts, and bonds, but there are hundreds of sub-categories. Common areas to invest in are stocks in geographical areas, such as North America, Europe, Asia and so on. Or, they can invest in Emerging Markets, New Companies, companies with green credentials, small companies, or the bigger so-called Blue Chip companies etc.

Bond funds can vary according to risk, for example high-yield junk bonds or investment-grade corporate bonds, type of issuers such as government agencies, or corporations, or even the maturity of the bonds as in short or long term.

At this time of year, you need to be aware of the ex-dividend date of any mutual funds you plan on purchasing. If you heed this advice, you avoid some nasty tax and investment performance consequences.

To explain why, let me first define “ex-dividend date”. On the ex-dividend date, all registered owners of a mutual fund become eligible to receive any declared dividends and capital gains distributions. If you do not own the fund by that date, you do not receive the payout. You also want to keep in mind the distribution date. After that date, you can go ahead and buy your shares without the negative impact on the NAV (Net Asset Value).

At this time of year (Oct – Dec), most mutual funds declare their dividend and capital gains distributions. You have nothing to worry about if you want to buy stock. Such distributions do not impact the share price. However, if you own mutual funds you need to consider the impact of this distribution on the NAV or share value. On the day of the distribution, you will see the NAV of your mutual fund shares drop by the declared dollar amount. In industry parlance, we call this “buying dividends”.

Here’s how it works. Throughout the year, the cash from dividends paid by stocks within the fund and capital gains realized from the sale of assets either accumulates adding to the fund’s cash balance or gets reinvested in equities by the fund manager. At the end of the year, the fund must distribute at least 95% (?) of the dividends/realized capital gains not reinvested in new securities. Typically, funds declare this distribution in the months of October and November.

At the end of the year, the NAV of the fund reflects the value of all the investments it contains plus the starting cash balance and the accumulated cash resulting from dividends and capital gains. When the fund manger distributes the dividends and capital gains, the NAV drops a corresponding amount. That’s fine for the people who have owned the fund most of the year. They enjoyed the NAV appreciation that resulted from the growth of the investment, the dividends, and the realized capital gains. An investor who buys just before the ex-dividend and distribution dates has purchased cash value. When the fund distributes the cash, the new shareholder sees the value of her fund shared decrease, receives back part of her investment, and then gets to pay taxes on in essence her own money! Not a good deal.

A look at an example will show why you want to avoid buying dividends. Suppose the ex-dividend date is tomorrow and you buy shares at a NAV of $25. The fund declares a dividend of $3.00 per share. Doing so means that tomorrow the fund distributes $3.00 of the NAV so your shares are now worth $22 instead of the original $25. You now owe taxes on $3.00 per share even though you didn’t enjoy the price appreciation you would have had if you had purchased at the beginning of the year.

You can see that you lose in this situation. You should avoid buying dividends. Instead, wait until after the after the distribution date to purchase your shares. Then you will get to enjoy any price appreciate throughout the year and not pay taxes on the return of your own cash!

How Funds are sold

Mutual Funds primarily depend upon individual agents and distribution companies to market their schemes to the investors. Nowadays, they also market their schemes directly.

The individual agents who sell schemes of various Mutual Funds also act as financial advisors to many investors. Hence they are required to clear various examinations before acting as an agent. Many Mutual Funds prefer to deal with distribution agency than individual agents as it is easier to manage. These distribution agencies, with their highly qualified executives, will be able to offer better financial advice than individual agents to the investors.

Nowadays, the sales officers and other employees of the investment companies directly approach the investors (particularly the high net worth individuals and corporate clients) to sell different schemes. However, most of the sales of Mutual Funds happen through other distribution route than from marketing directly.

Investment Policies

Every Mutual Fund has a specified investment policy which will be described in the Mutual Fund’s prospectus. A family of Mutual Funds will be managed by an Asset Management Company. This Asset Management Company will collect funds from investors and charge a management fee for operating them. They enable investors to invest across different market sectors and switch assets across funds while still benefiting from centralized record keeping.

The investment policies of different types of funds are as follows:

o Equity Funds. They invest in stock. However, they will hold 4% to 5% of their assets in money market securities to offer liquidity. Income funds will hold shares of firms giving high dividend yield and Growth funds will hold shares of firms that enable faster capital appreciation. Sector funds focus on a particular industry.

o Debt Funds. These funds invest in fixed-income securities. Different funds will concentrate on Treasury bills, corporate bonds, Mortgage-backed securities and other kinds of bonds. Some of the funds also specialize on maturity.

o Index Funds. Index funds buy shares that are included in a particular index in proportion to each share’s representation in that index. Investing in index funds is a passive strategy because the investors need not do any security analysis.

o Money Market Funds. These funds invest in short-term low-risk instruments of the money market. Since the liquidity is high, some of the funds even offer cheque writing facilities to their investors.

Apart from these funds there are many different varieties of funds with unique investment policies like the international funds which invest in different securities across the world, the balanced funds which minimize risk without compromising heavily on growth opportunities and current income and the flexible funds which depend on market timing.

Investing in mutual funds generate good returns when compared to other investment options. They can be divided into several categories based on their performance levels and the way they go about garnering profits for the investors. Based on several factors they are top rated according to the government criteria that are set and if they meet them. Based on these they are given certain ratings.

Best Funds:

The best funds can fetch you the highest rates of returns. The interest rates for all these funds are quoted on a three month basis. when you are thinking of selecting best performing funds you should consider how they have been faring in the market on a one year or three years basis. This will give you a fair enough idea about the way the fund is being maintained and the profits that they have been posting. You should also analyze the profile of the fund manager, his experience in generating profits and ability to take risk.

The best performing funds are those that are floated by companies that are different than the rest, have enough cutting edge to be ranked right on top and are doing well in the spheres of certain well defined criteria that have been preset to judge their performance.

To invest in mutual funds, we have to pay taxes and fees. So that amount will reduce our returns. We have to check those amounts before investing. Apart from that there are also systematic investment plans for investors who need flexible payment options.

Mutual funds are investments vehicles which allow you to be broadly diversified by owning a large array of stocks or a particular investment instrument. Funds are managed by a single individual or a team of managers. Their job is to maximize your investment within the fund’s investment criteria. The decision made by the fund manager(s) will determine whether you see a financial gain or loss on your investment. Mutual fund managers are responsible for researching investments, as well as buying and selling securities. Mutual fund companies pool money from thousands of investors. Each of those investors becomes a shareholder in that fund.

Types of Mutual funds

There are literally thousands of mutual funds available for you to choose. Virtually every type of asset class is available at your fingertips. There are hundreds of sites which provide information on mutual funds. Morningstar.com is one of the largest and most comprehensive sites available. Popular types of mutual funds:

General Stock mutual funds-These types of funds can invest in a wide variety of stocks. These can range from large cap to small cap international stocks.

Emerging market mutual funds-These funds specialize in investing in small developing and emerging nations. Within these types of funds, you can find mutual funds that invest in a particular country such as Vietnam or India.

Sector funds-Do you think semiconductor stocks will do well in future? Do you think that the price of gold will continues to rise? Sector funds may be an ideal investment. Your manager can only invest in stocks in the particular sector you’ve chosen. If you chose a telecom sector fund and that particular segment of the market sees dramatic results, your telecom sector mutual fund should see similar gains. Sector funds have become extremely popular in the last several years. The thought process behind purchasing a sector fund is to obtain diversity while focusing on a single sector of the market you believe will outperform the market as a whole. You are also hiring a manager who is supposed to be an expert in the particular sector you’ve invested in. Generally sector funds have higher expenses than general funds.

Bond funds-Do you believe the bond market will outperform the stock market? Yes, bond funds are available and there is a wide variety to choose. There are short term Us Government bond funds, municipal bond funds, international bond funds, high yield (junk bond) funds..well you get the point.

Hybrid funds o further enhance your portfolio choices, you can elect to purchase a hybrid fund. Also known as balanced funds, these mutual funds typically invest anywhere from 50-70 percent in stocks and the reminder in bonds and cash. The managers of these funds typically have discretion how the fund will be balanced.

Index Funds-Index funds are generally passively managed funds designed to closely match their corresponding index. Index funds do not allow their fund manager the latitude of selecting or become overweight a particular stock or sector within the fund. It is their job to match the corresponding index The only time a mutual fund would sell a stock in a passively managed fun is if the corresponding was reconfigured. For example, when Microsoft was added to the S&P 500 Index, those mutual funds who mirrored the S&P 500 Index, were forced to purchase Microsoft so they would stay in lock step. Index mutual funds have three distinct advantages over actively managed funds.

1) Low turnover-This will minimize your tax burden at the end of the year. After all, it’s not how much money you make, it’s how much money you keep.

2) Low expenses-Low expense ratios let you keep more of your money. An index fund may be 5 times cheaper or more to manage than that of their actively managed funds

3) Over a ten year time period index funds have a huge advantage of those of active managed funds. If you are a large cap investor, you stand a 73% chance of receiving higher returns over an actively managed large cap mutual fund.

Drawbacks to index funds

With their advantages over actively managed mutual funds, index funds do have a drawback. Since every fund has management expenses, you stand to NEVER beat the index you are trying to meet or outperform. If you want large cap exposure and decide to purchase Vanguard’s Index 500 mutual fund, you will lag the S&P. If Vanguard’s expense ratio was.2% and the S&P 500 return was 10% for the year, your return will be 9.8%.

While expenses are a drawback, you simply cannot acquire diversification for free. Everything comes with a price and investing is no different.

There are vast universes of investment choices available which can enhance your return. While it is difficult to beat the S&P 500, with the correct combination of index funds and proper asset allocation, it is possible to achieve superior returns. This takes know how, experience and nerves not to sell out when the market corrects. A good financial planner will be able to provide you all of these required skills.