Comparing Mutual Funds

When you are comparing mutual funds, you should remember that all mutual funds are not created equally. If you are comparing fund’s performance, you should measure them among asset class and industry level. A mutual fund specializing in technology sector growth equities is not equally comparable to an investment grade sovereign bond fund. Performance of asset classes changes along industry lines and investment categories. If you want to compare a fund’s ability to perform, relate it among its asset class. For mutual funds which can be closely tied to an index, you can compare the fund with its index or benchmarks of highly similar performance.

When you have found accurate benchmarks for comparison, you should note that you are not looking for absolute first place performance. Many funds which are successful in the short run cannot extend their performance over the long term. Most of the first place funds are highly volatile and return to average or below after a correction. You are looking for funds with stable market returns, or slightly above average performance over the long term. Since between sixty and eighty percent of funds perform below the market in any given year, meeting index or market returns on a stable basis outperforms most available funds. This usually means an index fund. If not, you need a management team which is competent and is able to provide consistent returns close to the index, benchmark, or industry average. A fund which excels above industry average during upturns then crashes during downturns is not necessarily well managed.