Best Performing Mutual Funds Choose Well And Pinch Expenses

2007-03-08 10:33:40

( Financial )



There are several thousand mutual funds in the market. The odds that you can pick out next year’s top performing, high yield mutual funds are very small.

It is difficult to identify the best performing mutual funds. But there indeed are mutual funds that have performed better than others over time, like Janus mutual. You will observe that a significant reason for the superior performance is due to these mutual funds picking stocks, within their style specialization, that outperform other stocks having similar style characteristics.

You may think it is all due to a portfolio manager with hot hands. It is more than that. The best performing mutual funds usually employ an elaborate, sophisticated computer program to pick a sample of stocks that fairly represent particular sectors (or the entire market) that the fund wants to invest in. You will see the best performing mutual funds try to make their sample resemble the target sectors in terms of industry distribution, dividends issued, market capitalization and other characteristics.

You may want to look at past performance in your search for the best performing mutual funds. If you look at the past-year’s net return among mutual funds, you will find that last year’s best performing mutual funds will also tend to be this year’s best as well. Industry analysts attribute this predictability to the momentum effect in stock returns. The momentum effect is a well-known observation that finds the highest-return stocks of one year have following-year returns that are better than the market.

You should also bear in mind that a mutual fund’s net return is affected by its expense charges. Most mutual funds and pooled investment products charge over 1 percent per year in expenses before commissions. You will find that the best performing mutual funds charge much less, only a small fraction of one percent.


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