Monday, August 6, 2007

How to select a Mutual Fund

John C. Bogle writes in the book, "Bogle on Mutual Funds - New Perspectives for the Intelligent Investor" on how to invest in a mutual fund.Here are five points to keep in mind:

1)The immediate past performance of the mutual fund.In most cases, a fund should prove its merit over a period of at least five to ten years.” Chances are that a fund which has performed well for this period of time has seen various phases of the market and performed well across these various periods.

2)The fund manager who is managing the scheme. As Bogle writes “Find out whether the portfolio manager has run the fund for a few months, a few years, or a few decades, and give this information whatever weight you deem appropriate".

3)If the fund manager has changed recently for that Bogle’s advice is “when managers change, a wait-and-see policy is usually appropriate.”

4)Portfolio concentration. “It is not enough to know how many stocks a fund owns, because many of them may represent a small percentage of the net assets and have little impact on the fund’s overall performance. The better test is the proportion of total assets the fund holds in its largest positions. One good measure is to check the fund’s ten largest holdings. In the more concentrated funds, the ten largest holdings may comprise up to 50% of the portfolio; in the less concentrated funds, they may comprise as little as 15%. As a general rule, the greater the portfolio concentration, the greater is the opportunity for the fund to provide differentiated performance,”

5)The size of the mutual fund. Investing in schemes with very small assets under management (AUM) is not advisable, as Bogle writes “simply because of the relatively higher expenses associated with small funds.”
Source: DNA