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Saturday, May 2, 2009

Finding the Best Mutual Fund

From the Hoss's Mouth

The best mutual funds are those that produce the highest total return from the date of your initial investment. That's easy for everyone to understand. However, what's not so easy is determining which mutual funds are most likely to produce the greatest return over time.



Some investors may think that if a fund returns 10% one year and loses 10% the next year they have at least broke even. Wrong. If you invested $100,000 and gained 10% the first year your total would be $110,000. Now you lose 10% the next year your balance is $110,000-10%= $99,000. You are down $1000. What about if I lost 10% the first year and gained 10% the next year? Sorry, same result. You still have only $99,000.


To further complicate the issue, for time periods of more than one year, a mutual fund's total return is annualized. When doing your research, you the discreet investor will avoid these annualized returns and concentrate on a mutual fund's year to year actual total returns. Why? Because annualized returns are not an accurate report of a mutual fund's total performance. Take a look at the following chart.


Year

Fund 1

Value

Fund 2

Value

Fund 3

Value

Fund 4

Value

1

5%

$105,000.00

5%

$105,000

0%

$100,000

-10%

$90,000

2

5%

$110,250.00

2%

$107,100

10%

$110,000

-5%

$85,500

3

5%

$115,726.50

8%

$115,660

5%

$115,500

30%

$111,150

Annualized

5%

5%

5%

5%

Return

Compound

5.25%

5.22%

5.17%

3.72%

Return



Note that each of the four mutual funds have an annualized return of 5%. Yet they do not all produce the same end result. The best result is $115,726.00; the worst $111,150.00. A very significant difference of $4,576.00.

Bottom line: The wise investor, in order to pick which mutual funds are likely to produce the best return over time must carefully research each fund and concentrate on the year to year returns. This information is available on the website of most mutual fund companies. The longer a mutual fund has been in existence the easier it is to evaluate its track record.


Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: May 03, 2009
Previous Post: The Best Mutual Funds

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