How to Conduct a Mutual Fund Comparison


Mutual fund comparison can help you select the ideal scheme to meet your investment goals. When conducting such an evaluation, looking at multiple parameters is crucial rather than only considering returns alone.

Before selecting any fund, it is essential to carefully evaluate historical returns, risk levels, and costs to create a holistic assessment and ensure you choose funds that align with your financial goals, risk tolerance levels, and investment horizon.

Historical Returns

When comparing mutual funds, paying attention to their historical returns is crucial. Doing so allows you to gauge their performance and assess if it can meet your financial goals; furthermore, historical returns will enable you to measure how the fund has performed under various market conditions.

Not only should you compare the historical returns of each fund you’re considering, but you should also carefully assess their expense ratios. Over time, higher expenses will reduce net returns. Hence, it is essential that when making investment decisions, you consider both costs as well as historical performance into consideration when making decisions about which investments to buy or hold onto.

Mutual fund performances vary considerably depending on their exposure to market fluctuations. Generally, higher-performing funds tend to fare better during bull markets than bear markets; however, basing long-term predictions solely on past performance is no guarantee.

Reviewing a fund’s history over various periods – 1 year, three years, five years, and since inception – will allow you to get a complete picture of its performance as it weathered market fluctuations.

Keep an eye out for a fund’s historical alpha and beta metrics; these measures show how its performance stacks up against its benchmark index, where higher alphas indicate outperformance while lower betas suggest underperformance. A fund with high alpha will outshine its index, while a low beta may have underperformed it.

Historical returns are calculated based on total returns, which consider income and capital appreciation. This differs from yield, which only accounts for interest income without considering distributions. Since performance can change quickly over short periods, investors should research past performances before making commitments for the future. To do this, many investors examine multiple-year returns rather than only looking at one.

Risk-Adjusted Returns

When investing, one must consider both the return on investment and how much risk was taken to reach that return. A risk-adjusted return measures both performance and risks taken across a portfolio – for example, mutual funds versus index investments or other investment alternatives.

Various approaches to calculating risk-adjusted returns exist, but William F. Sharpe developed the Sharpe ratio in 1966 as the most popular method. It measures the excess return earned over risk-free rates per unit of volatility or total risk as measured by standard deviation – eliminating random fluctuations that might otherwise obscure an investment’s actual performance and giving more accurate figures about its success.

Treynor Ratio is another widely used method for measuring risk-adjusted returns, using expected utility theory as its foundation. This metric considers the level of return that an investor is most likely to obtain, given their risk tolerance and investing horizon. Furthermore, Treynor Ratio allows comparison between funds with different investment styles or evaluation of various mutual fund managers.

Fund risk-adjusted returns cannot be understated, especially during bull markets when investors focus on potentially high returns without considering the risks involved. Over the past 12 months, we’ve witnessed how quickly returns can deteriorate when interest rates increase, reminding us to pay close attention.

In assessing the risk-adjusted returns of a mutual fund, you should review its historical risk-adjusted returns from three, five, and 10-year periods, as well as its most recent one. Furthermore, consider its beta and correlation to its benchmark index – funds with lower beta/correlation will be less susceptible to interest rate changes. In contrast, a higher beta indicates increased volatility and potentially significant losses during market downturns. Furthermore, evaluate each fund’s manager track record and first-year returns if applicable.

Expense Ratios

Expense ratios should be considered when selecting a mutual fund or ETF since fees charged by funds reduce the amount returned to investors and increase expenses. One such fee is management fees, which pay fund managers to oversee and implement its strategy. They range from 0.5% for actively managed funds to 1% or higher for passively managed ones that attempt to replicate an index. Other expenses could include licensing fees paid to major stock indexes and recordkeeping and custodial services fees.

Often, fund expenses are expressed in basis points (bps), with one basis point representing one percent of an investment’s assets. You can find an expense ratio on any given fund’s prospectus or its daily net asset value (NAV), so before making your choice, it is vitally important that you conduct thorough comparisons of operating costs with comparable competitors before making a purchase decision.

Additionally, before investing, you must consider any fees charged by funds over time, such as front-loads, back-loads, and redemption fees. As these additional expenses could significantly lower long-term returns, it’s wise to know their implications before deciding.

At the core of it, all lies two critical considerations when choosing a fund: its return potential and risk profile. An expense ratio-low fund with proven success should do well over time, while those with high expenses could potentially underperform.

TD Ameritrade’s Fund Analyzer tool makes it easy to compare the operating expenses of different funds against each other. Select your fund of choice, provide a target investment amount, and the calculator will show its annual operating expenses and any potential charges like front-loads or redemption fees that may apply, along with their potential impact on returns over time. You can use it with mutual funds, CEFs, ETFs, or index funds.

Share Class

Mutual funds come in different varieties, creating other classes of shares. These differences often impact how much investors pay in fees to the mutual fund – something to remember when selecting one for your retirement plan.

Old sayings such as “High costs equal quality” couldn’t be further from the truth, yet understanding your total investment fees and costs is essential to successful returns. Mutual fund fees influence their performance; for instance, if an overly risky manager attempts to produce higher returns with additional risks taken on, expenses associated with it will cut into your overall gains over time.

Most mutual fund fees consist of sales charges and annual operating expenses. Sales charges (or loads) represent the commission paid when buying and selling fund shares. At the same time, operating expenses include management fees, distribution service fees, 12b-1 fees, and other operational costs.

Typically, purchasing more shares of a mutual fund reduces fees; however, there may be exceptions to this rule. Funds offering A, B, and C share classes may have front-end sales loads of up to 5.75%, with the C class typically charging an annual load charge equivalent to an amount equal to 10% of your initial investment for as long as your shares exist.

Certain mutual funds also charge 12b-1 fees to brokers for selling them funds, so when selecting such investments, it is wise to review their prospectus and compare prices against similar funds in your market to determine the most suitable options for your retirement plan.