Money & Investing - Banks.com

With the stock market in disarray (though recovering, it seems), many people are turning to mutual funds as an investment. These offer automatic diversity, as well as take away the pitfalls associated with picking individual stocks. However, as many are finding out the hard way, even mutual funds can fall, and some can result in losses. Your brain can’t take a vacation just because you are looking for a fund; you still need to pay attention and choose wisely.

Instead of looking at recent performance, Kiplinger offers 5 things to look at when vetting your fund investment:

1. Expense ratio: This is the number of fees you pay. Look for a fund with low fees, and you will keep more of your returns. Additionally, low-fee funds actually outpace their higher-cost counterparts over the long haul (10 years or more). This is one reason that I like index funds so much.
2. Stewardship: This reflects how fund managers see their shareholders. Morningstar actually rates stewardship, and you should be very wary of funds who score a D or an F. You want funds that will protect shareholders before maximizing profits for managers.
3. Risk: Avoid risky funds that are more susceptible to market volatility. However, you still have to realize that during times like these, even the less risky funds are going to take a beating.
4. Manager stake: You want a fund that the managers are investing in. Check to make sure that your managers are vested in the fund’s performance as well. The Kiplinger article recommends that at least one of your managers should have at least $500,000 invested. This rule does not apply to index funds, however, since there are no managers. Money market funds are exempt as well.
5. Management quality: You want someone who employs sound strategies when making investment decisions. Look into backgrounds to make sure that you are getting competent managers. (Again, this rule is inapplicable with index funds.)

In the end, there is so much more that is more important than performance over the last one to five years. What’s more important is picking a fund that will provide you solid returns over the long haul.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.