Some Facts About Mutual Fund Performance
Mutual fund performance is generally ranked by comparing the funds' performance to the S&P 500 or to some other reputed index. This is so called benchmark. For example S&P 500 represents benchmark for all mutual funds that follow S&P 500. Most actively managed funds have been unable to beat the S&P 500 index despite making tall claims of having 'experts' to manage the funds and produce spectacular results. These claims are widely advertised and it is shareholders who have to ultimately bear the costs of such promotions and advertising. Performance results eventually prove that these were merely puffed up claims promising high returns. The returns are unimpressive and below average stock market returns.
Among prominent reasons for low profit margins is the unusually high management cost imposed on the funds. Mutual fund companies keep on hiking fees every year despite under-performing. The actual fund management costs that are charged may be as high as seven percent plus even when advertised as being less that one percent. As for annualized returns, actively managed equity linked mutual funds provide roughly two percent less as compared to general stock market returns. There are no indicators at present to suggest that actively managed mutual funds will perform any better than the stock markets in the foreseeable future.
If you want to check out a particular mutual fund performance, one of the best places to go to would be the Morning Star website. Log onto Morningstar.com and enter the name of the mutual fund or the ticker symbol and you will be presented with a lot of useful information that would also include a year by year comparison with the S&P 500 index. If it is a mid cap or small cap fund, you may additionally find a comparison with the Wilshire 5000 or another appropriate index
Comparing facts and figures related to actively managed mutual funds with the stock markets could provide ample food for thought. Even when a two percent difference does not apparently seem to be very much, it boils down to a lot when considered from a long-term investment perspective. Average stock market returns historically have been around ten percent. At ten percent per annum, a $10000 investment compounded over fifty years would yield $1,170,000. The same investment compounded at eight percent would yield just $470,000. That is a whopping sixty- percent difference amounting to $700,000. In effect, after providing one hundred percent of the initial capital, such an investor would be left with just forty percent of the entire returns. The finance industry would soak up sixty percent with zero percent investment. No investor would consider this to be a fair distribution. In this scenario, experts recommend that an investor with a preference for investing in mutual funds rather than in individual stocks should go for an index mutual fund. Records and reviews of index mutual funds performance over the last few years have shown that these investment funds are consistently better than actively managed funds (for long term investments).
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