How To Review Your Mutual Funds

Five Key Factors to Look Into

Take a deep breath. The markets look terrible! Your retirement program looks desperate! The professional managing your money has tanked along with your hopes, your aspirations and your confidence.  However, experience tells us that the world probably will NOT end! Yet! If you have a 401(k) or a Registered Retirement Savings Plan (RRSP), the likelihood is that some, if not all, of your resources are in mutual funds. Or, you could just be a direct investor in mutual funds as you want your money managed by a professional. If so, you must have seen most of the types of mutual funds available: fixed income, money market, equity, growth, index, emerging market, balanced, ethical and lots more. You may ask yourself why, in the middle of the chaos out there now, should I review my mix? Well, maybe your goals have changed. Maybe, retirement just moved out another 5 years. Perhaps, your financials look a tad shaky after the toxic mortgage festival of the last few months! Will resource funds ever come back?  Given your knowledge and experience now, you may want to customize your own 401(k), RRSP plan or portfolio. Here are some steps you can take without being a financial whiz:

Step 1

Look into the fund's actual returns. This includes investment appreciation and dividends. Look into the fund's multiyear performance, not just the current year. Compare returns on a 3-year, 5-year and 10-year basis. When you compare, look at the annual returns, not the cumulative numbers. At times, these cumulative numbers disguise the fund's actual performance and they really do not show you the consistency in its performance. As an example, the fund can have a stellar year but just average performance in 9 years, this will not show in the cumulative figure. As such, you will not get an accurate story of how it performed. When it is time to sell, you have 9 times out of 10 to do this on an average year

Step 2

Look at the track record and tenure of the fund manager. Some funds change their managers often. However, you still can track their performance. You need to look at their style. One strategy is to go for one whose investment style is closest to yours. The other, is to go for one whose style is totally contrary to yours so that as you quiver in fear, she is howling at the market like a wolf in a rabbit warren. This way, you achieve balance. More than style, look at the manager's performance. Look for those who are not only smart but who work very hard. Find out as well, if your manager is new. If he is, look into his experience in his previous fund management, if he has any. If she is new, keep a close monitoring of your fund.

Step 3


Look at the associated costs and expenses. Some funds are referred to as no-load funds which means they do not charge front-end or back-end fees. Some charge front-end loads, a percentage of your initial investment which can range from 2-5% and some charge you again when they reinvest your dividends back into the fund. Other funds do this at the back-end when you cash out or redeem your funds and the percentage more or less varies, at time, higher in the first year of ownership and then lower after five years or more. There are also fees for marketing and distribution which you will see many times as part of the fund's expense ratio, if it is not detailed separately. Another expense is taxes. This is incurred by the fund each time the manager sells a fund holding at a profit. This is often a surprise bite as we are not aware of the investments the manager makes each day. The more frequent the trading, the bigger is the tax bite. Actively managed funds often have higher tax bills than index funds. Make sure the costs make sense. Look for a line that says expense ratio. Your manager gets paid even if your fund dies! How much is the manager skimming? 1%....2.5%....check...that is a hand in your pocket.

Step 4

Look at the holdings in your fund. Do not just rely on the fund brochure. Search in the web. You are always better off to be well informed. Sometimes, you may want to find out if those are the companies you want to invest in. Maybe not! As well, compare the holdings of different funds. Often, the name of the fund may be different but the companies they hold are more or less similar so you may think you have diversified investments but not really.

Step 5

Look into the size of the fund. Think twice before buying into new funds unless it is part of an established fund family. You will end up subsidizing its start-up costs. Some say stay away from funds with less than 50 million in assets as expenses will be spread over fewer fund holders. On the other hand the ones over 1 billion may just be too unwieldy to manage and returns are not as good as the smaller funds.

When you do your review, be acutely aware that past performance is no guarantee of future success. The market has its own moods. But the amount of risk you can accept changes over time and the reality of economies changes too. So do your review and do this regularly. After each review, you may or may not take the key steps necessary to meet your financial goals and requirements as well as your lifestyle changes. And do NOT panic. Markets go up and markets come down. This one is a gut wrencher, but we will recover, and re-balancing to benefit from recovery is a priority. Not all of us are lucky all the time, but over time, if you manage fear and greed when the folks around you are doing their henny penny "the sky is falling escapade", you will surface with a grin.


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