How to Select Top-Performing Mutual Funds
- 1). Log on to Morningstar.com, a prominent mutual fund database.
- 2). Select the "Funds" tab in the menu across the top of the screen, below the logo.
- 3). Scroll down the page to the section called "Mutual Fund Performance and Ratings." Select the option called "Fund Quickrank."
- 4). Select a fund category and a ranking field. You can choose to search for the top performers for the year to date or for up to the past 10 years. You can search among U.S. stock funds, bond funds, balanced funds or alternative funds. The longer the time frame you select, the more different market cycles are included in the data used to compute the fund's returns. Keep in mind, though, that this information is backward-looking.
- 5). Click on the ticker symbol. Be sure that the fund you are looking at meets your investment objective. If you are looking for a core holding of large-cap stocks, for instance, the Intrepid Small Cap fund (ICMAX) may not be an appropriate holding for you, despite its strong return over the five years ending in November 2010. You should compare funds that invest in similar kinds of investments to each other.
- 6). Look at the expense ratio. The fund charges investors the expense ratio, defined as a percentage of assets in the fund, to pay the fund manager. The higher the ratio, the more difficult it is for a mutual fund to beat its peers and the market as a whole.
The size of the expense ratio is a large determinant of a mutual fund's performance as compared to its peers. Different kinds of funds have different expense ratios, due to the trading costs intrinsic to certain kinds of securities. Small-cap funds tend to have higher trading costs than large-cap funds, and foreign stock funds tend to be more expensive than U.S. stock funds. - 7). Consider index funds. Choosing which funds will outperform their peers is extremely difficult and may be impossible to do reliably and consistently. Because index funds are not actively managed, they tend to have lower expense ratios than actively managed funds in the same fund category. As a result, index funds very frequently outperform the average actively managed fund in the category, especially in taxable accounts.