How To Compare Mutual Funds

Never mind the warning seasoned investors give out every time, even what the funds themselves state in their brochures, people always tend to judge a fund from its past performance. So, "past performance is not a guarantee of future results" just about manages to gather as much attention as the surgeons warning on a pack of cigarettes, maybe less. But then someone from the crowd stood up and said, "but there's no other way to compare mutual funds."

Fair, I said, the problem never was that people compare past results. However, the blind faith that people showed on the past results, as if the results would simply mirror itself year after year as those theoretical graphs which show a straight line that keeps on rising, was the reason for concern. Alas, real life does not move in a straight line, and neither do markets.

And then people started comparing apples and bananas! And soon I witnessed in the parties that I attended, that people around me, were comparing past performance of different mutual funds that lay in different category, and thus making their investment decisions! One of the most common mistakes people seem to make was that all mutual funds from a single parent company were the same. So instead of recognizing different mutual funds, they just would look at the results of one of the mutual funds from a company and would believe that any fund with the name of that particular company would perform in a similar way! That is wrong.

A company "XYZ" might have different mutual funds under their umbrella, lets say fund A, B, and C. All these funds would have different people managing it, and also these funds would have different goals, and would invest in different capital markets. Some fund would be designed for short-term growth, while other would be aimed at giving good returns in the distant future. So, to compare the two-year performance of a short-term growth fund, and a long-term returns fund is obviously wrong, even if they are from the same parent company. A big corporation like Sony would have cell phones, plasma TV, flat screen monitors, music players, digital cameras and camcorders, gaming consoles, desktop and notebook computers, as well as GPS navigation systems. Obviously, some of these products would be very good, while for others; you would prefer a different company. The same goes for mutual funds. Just because fund A from a particular company XYZ is showing good performance, it doesn't necessarily mean fund B, and C would give like wise results.

Before you begin investing in mutual funds, you should first determine what is yours investment objective or a goal. For some it would be a regular income by the way of dividends, for some it would be short term gains as they would be uncomfortable staying in the market for a long time. Still, for others, investing in mutual funds would be paying for child's college education 15 or 20 years down the line, or planning for retirement. All these are different needs, so obviously a common fund wouldn't work for all. Apart from this, as I mentioned in the beginning (and this is not something new), that the past performance of a fund does not guarantee it's future returns. So you should look at other aspects of the funds, like who are their managers, which markets are they going to invest in, is it actively managed, how long has it been functioning etc. You should take all those into an account when you are doing a review about mutual funds in order to choose best mutual fund. In general, during a bull market, all funds are bound to show at least some amount of growth. But how would the same funds perform when the bear comes biting? These are the things that need to be looked at, and compared, but only with similar funds.