It Is Essential To Compare Mutual Funds

By: AlenCaller

Buying mutual funds is just like making any other purchase but it can have grave consequences if you make the wrong choice. This makes it essential for you to review and compare before deciding which one to buy. Your valuable savings might be at stake and your future might be jeopardized due to a slight negligence on your part. There are many different mutual funds available today and it is not easy to short list from among them in order to make a final choice.

Compare Logically

As a first step, mutual fund ratings and historical rates of return provide a good basis to compare them but that is not sufficient. Many people rely heavily on past performance to make the comparison believing that if the past performance has been good, the future performance of the fund will also be good. This can be a good basis of comparison provided the ratings are obtained from a reliable source such as the Morningstar. Most investment advisors recommend going in for 4-star and 5-star funds but is that sufficient for making a safe and profitable investment? Your investment risk might not be fully covered by doing so because the ratings keep changing with changes in the financial environment taking place all the time. As such, in order to compare, it is not enough to merely go in for high rated funds. You need to compare logically in a broader sense.

First of all in order to compare mutual funds you should compare similar types of funds. You should not compare a growth fund with an income fund. In order to choose the best mutual funds for investment, you should compare them in the following five areas.

• Fees
• Management
• Standard Deviation
• Beta
• Relative Performance

Other Statistics

Certain other statistics are also essential and can be used to compare mutual funds. These are:

• Arithmetic Mean
• Risk-Adjusted Return
• Standard Deviation
• Beta
• Sharpe Ratio
• Coefficient of Variation
• Treynor Ratio

You can find these statistics on Internet sites like Yahoo! It is necessary to understand these terms in order to make comparisons. However, this might not be easy. Help can be sought from a financial advisor to make the comparison for you. One aspect that must be taken into consideration is the risk ratio. It is only by taking risks that you can achieve returns in excess of what other riskless funds might offer. As such, if two funds have equal risk-adjusted returns, the one with a higher risk will give better returns.

It is only by making a thorough analysis of the above important aspects that you can compare mutual funds accurately and take the right decision.

Article Source: http://yourfinance.co.za

About The Author
It is important that you review and compare mutual funds to maximize your returns on investment. To know more about mutual fund investment, you may visit the Finance Enquiry web portal.