Mutual Fund Questions: What Does It Own? Who Runs It? What Does It Cost?
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Mutual Fund Questions: What Does It Own? Who Runs It? What Does It Cost?
To set realistic expectations for what a fund can do for you, it’s important to know what kinds of securities a fund’s manager buys. Stocks? Bonds? Both? These broad asset classes have different characteristics, so you shouldn’t expect them to perform in a similar manner. For example, most investors wouldn’t hope for a 10% gain from a bond fund, but that kind of return isn’t an unrealistic expectation for certain stock funds.
Things To Know
- To get a feel for how a manager invests, examine a fund’s portfolio.
- Are the expenses enormous?
Unfortunately, you can’t rely on a fund’s name to tell you what it owns. A fund may be a giant in the industry, but its moniker may give you very little idea of the types of securities its manager buys.
As we mentioned earlier, fund managers can buy just stocks, just bonds, or a combination of the two. They can stick with U.S. companies or venture abroad. They can hold popular big companies, such as Coca-Cola (KO) or WalMart (WMT), or focus on small companies most of us have never heard of. They can load up on high-priced companies that are growing quickly, or they can favor value stocks with lower earnings prospects but cheap prices. Finally, managers can own 20 or 200 stocks. How a manager chooses to invest your money is one of the most important factors that will drive performance.
To get a feel for how a manager invests, examine a fund’s portfolio. The financial statements published by the mutual fund company always disclose this information. You can also access portfolio data, including top holdings, sector breakdowns, and other data on investment research Websites.
Who runs it?
Mutual funds are only as good as the people behind them: the fund managers who make the investment decisions. Because the fund manager is the person most responsible for a fund’s performance, it’s important to know who calls the shots for your mutual fund—as well as how long he or she has been doing it. Make sure that the manager who built the majority of the fund’s record is still the one in charge. Otherwise, you may be in for an unpleasant surprise.
What does it cost?
Mutual funds aren’t free. You should pay for professional money management if you need it, but paying enormous expenses to invest is like giving money away. That’s because every penny that you give to fund management or to brokerage commissions is a penny you take away from your own investment portfolio. Further, costs are one of the few constants in investing: they’ll remain pretty stable year in and year out while the returns of stocks and bonds will fluctuate. You can’t control the whims of the market, but you can control how much you pay for your mutual funds.
Unfortunately, fund costs are somewhat invisible, buried in shareholder reports and taken right off the top of your fund data.
