Investing has become a big topic over recent months and especially mutual funds have been shifted into the public spotlight.

Our immediate emotional response would be to move to the sidelines – a cash or money market account. We can rationalize that it is better to not make anything than to see a loss. However, that is a form of market timing, and it does not work for long term investing. Most investors miss the biggest opportunities while sitting in a money market account. Today, we will look at five of the most common criteria advisors use to evaluate mutual funds. Using these criteria individually can be helpful in maintaining a better quality investment portfolio. Performance alone is not something to consider.

Too often, investors look at the investment return tables and choose the funds that have the largest numbers. That’s not quite the best method to use. While we do want funds that are performing well, if we only choose all of the top performers on the list, we are very likely to pick most of the higher-risk options and none of the more conservative choices. We need to compare apples to apples. We want to evaluate a fund against its own peer group. Large cap value funds should be compared to other large cap value funds. Intermediate term bond funds should be compared to other intermediate term bond funds.

Funds should be compared against their own peers and their respective benchmarks. While any fund in any category can have a good year, we want to make sure that a great return is not simply a fluke – a bet that paid off well. Looking a five-year performance can give us a better idea of whether the manager is able to sustain good performance. There will usually be one or two bad years in a five-year cycle, so this will help us evaluate a manager in both good and bad years. This performance should also be considered against peers and the respective benchmark.

Performance doesn’t mean much if a manager is new. We cannot give much consideration to a fund’s 10-year performance record if the manager has only been working with the fund for two or three years. That would mean that the majority of the fund’s history is attributable to another manager. Funds with new managers need to be monitored carefully. Sometimes they are replacing a manager with a bad track record. Other times, managers retire or decide to move on to other opportunities. Nevertheless, it will take awhile to get a good idea of whether or not the new manager will be a valuable addition to the fund.

If you are looking forward to being a long-term investor and growing your capital, the aggressive growth fund would be the right one for you. These have high potential of return on capital but equally high chances of risk. If you cannot afford the high risk factor but are interested in adding to your capital growth then either growth, international and sector mutual funds would be the top ones for you. Growth and income funds are the right ones if your goal is to create income and you can handle risks ranging from moderate to high. There are good chances of dividends and return on capital.

While some investment products are less forthcoming with their fee structure, it is still important for an investor to understand the costs involved in owning the funds. Fees should be comparable to other peers and not excessive. While this list is far from complete, it describes the most common criteria used to evaluate retirement plan mutual funds.

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