Top 10 Best Mutual Funds and Whether They're Right for You
Take These 11 Steps to Avoid Picking the Wrong Mutual Fund
Many financial advisors recommend you get some of the top 10 largest funds. They reason that any mutual fund that attracts so many investors must be a good performer over time. The funds are so good that few people leave them even when times are bad. As a result, they continue to grow in size. But the list includes bond and stock funds. Which is better for your portfolio?
U.S. News ranks over 4,500 mutual funds. Their experts look at the funds’ historical and current performance, risk, and quality. But before you can use the ranking, you must know whether you want international or domestic funds. Do you trust Vanguard, Fidelity, or iShares?
Some experts will tell you the 10 best funds for 2019. They review the current economic conditions to determine which funds will perform best over the next two to three years. They mention balanced funds, which mix stocks and bonds for you. But what's the best mix for you? If you don't need the money for another 15 years, do you care what does best during the next three years?
11 Steps to Take to Find the Best Funds for You
Before you can take advantage of a top 10 list, you must know your financial needs. Here are 11 tips to guide you through the process:
- What are your investment goals? Are you saving for retirement? Then you can afford to be patient and hold funds through bull markets and bear markets. Are you saving for down payment on a new home? Then you'll need the cash in a few years and must be more cautious.
- Make sure that funds fit your investing habits. For example, if you want to take advantage of daily ups and downs in the market, you can't use funds at all. They only trade at the end of the day.
- Only choose funds that fit within your asset allocation strategy. For example, in the early phase of a business cycle, small-cap companies traditionally do best. You might pick 10 of the best performing funds, but if they are all small cap, then you will suffer more losses when large-cap does better in later phases.
- Be alert to mutual fund fees, which can reduce your returns anywhere from 0.5 percent to 8.5 percent. Fees are sneaky. Front-load fees are deducted right off the top, while back-load fees are deducted if you withdraw your investment within the first five years. Most funds have management expense fees, expense fees, and 12b-1 fees. Some experts say only pick no-load funds and those with an expense ratio below 1 percent.
- Use funds that increase your diversification. Having more funds doesn't always increase diversification. Many funds own the same stocks. Check each fund's major stock holdings to make sure they don't overlap.
- Will the funds be in a tax-deferred portfolio, such as a 401(k), IRA, or Roth IRA? Then you don't have to worry about turnover. That's how much of the fund is sold and turned over into new stocks. If your fund is subject to capital gains taxes, stay with funds that have a 50 percent or lower turnover ratio. Otherwise, you'll get taxed on the gains of stocks sold, even if the overall value of the fund drops during the year.
- "Past performance is no guarantee of future success." You'll hear this everywhere, but what does it mean to you? It's simply a statement that says looking at how well a fund did in the past doesn't mean it will do the same in the future. There's plenty of research that shows 99 percent of funds that outperform the market in one decade fall to the average the following decade.
- Now that you know what type of funds you need, how do identify the best within those categories? Remember, you are betting on the expertise of fund managers, so you've got to follow their performance. You are really looking for a manager that can outperform the market. In this case, that means the specific index related to that type of fund. For example, a small-cap fund must outperform the Russell 2000, not the Dow. Studies show that two-thirds of all actively-managed funds do worse than their benchmark indexes. So, choose fund managers that have been around for at least five years. If you're not comfortable relying on a manager, you may not want funds at all. You might prefer the advantages of stocks versus mutual funds.
- Pay attention to the fund company. High-quality firms, such as American, Vanguard, T.Rowe Price, and Dodge & Cox, can afford to hire the best managers and treat them well so they stick around.
- You research funds yourself with Morningstar. They have all the information and a handy rating system that helps pick the best performers.
- Let's say you've looked at Morningstar and are overwhelmed with the choices. The next step is to pick a good financial advisor. Let your advisor select the mutual fund for you.