How to Select a Mutual Fund - A 10-Part Guide to Picking Winning Mutual Funds

All else being equal, you want to own funds that have the lowest possible expense ratio. If two funds have expense ratios of 0.50% and 1.5%, respectively, the latter has a much bigger hurdle to beat before money starts flowing into your pocketbook. Over time, you would be shocked to see how big of a difference these seemingly paltry percentages can cause in your wealth. Just flipping open the Morningstar Funds 500 2006 Edition sitting on my desk provides an interesting illustration. Take for example, a random chosen fund, FBR Small Cap (symbol FBRVX). When all of the fees are added up, the expense projection for 10 years is $1,835. This is the amount you might be expected to pay indirectly (that is, it would be deducted from your returns before you ever saw them) if you bought $10,000 worth of the fund today. Compare that with the Vanguard 500 Index which is a passively managed fund that seeks to mimic the S&P 500 with its fees of only 0.16% per year and projected 10-year cost of $230 and it’s not hard to see why you might end up with more money in your pocket owning the latter. Combined with the low turnover ratio, which we’ll talk about later, and it’s not hard to see how a boring low-cost fund can actually make you more money than sexier offerings.

Index: How to Select a Mutual Fund - A 10-Part Guide to Picking Winning Mutual Funds

1. Why You Should Always Buy No-Load Mutual Funds
2. Pay Attention to the Expense Ratio It Can Make or Break You!
3. Avoid Mutual Funds with High Turnover Ratios
4. Look for an Experienced, Disciplined Management Team
5. Find a Philosophy that Agrees with Your Own when Selecting a Mutual Fund
6. Look for Ample Diversification of Assets
7. The Case for Index Funds
8. A Word on International Funds
9. Know the Appropriate Benchmark for Your Mutual Funds
10. Always Dollar Cost Average