- 1). Retrieve the prospectuses for the mutual funds you will be comparing. Also, log onto a financial website that has mutual fund information and numbers.
- 2). Find the objective and goals for the fund. This is usually in the first few pages of the prospectus. Compare what the fund is permitted to invest in, and what the fund usually invests in. Note: the difference is what the fund normally does, and what the fund cannot legally do. For example, a fund can be restricted from buying international securities which means that it cannot and will not buy them without having to inform you. A fund which usually invests only in U.S. securities could actually purchase International securities without notifying you in advance. Note the goal of the fund. It is important to pay attention to wording and order. A fund with a primary goal of capital appreciation and a secondary goal of capital preservation will be less conservative than one with the reverse.
- 3). Find the fees and expenses associated with the mutual fund in the prospectuses. This information is usually available online, but many funds come with variances in the numbers depending upon factors like how much you invest, or how long you hold the investment, as well as what share class you purchase. Usually only one of these numbers is reported on the electronic databases. Make sure you get the information relevant to your potential investment. There are multiple fees to look for. One is the load or sales charge (if any) the other is the selling charge or commission (if any) and another is the expense ratio. Determine which fund is more expensive, and by how much.
- 4). Compare the annual returns, total returns and average returns. Use the online research for this one so that the data is recent. The prospectus could be several months old and since it contains audited numbers, the numbers inside on the day it is printed are already a few months old. Don't check just one or two numbers. Also, do not only check averages, which can hide a poor year when averaged with better years.
- 5). Compare manager tenure. Using either the prospectus or your online reference, check how long the fund manager has managing the mutual fund. Any data from before that date should not be used in your comparison because that data comes from a previous manager. If one fund has a manager that has been there for five years and another fund has a manager that has been there for 15 years, you can only compare the five years worth of data. You can of course, take the length of manager tenure into account when choosing your fund.
- 6). Make your decision. With your comparison in hand, one fund should stand out above the other. Ideally, you want the fund with the lowest expenses, the objective that most closely matches your own, the highest returns, and the longest manager tenure. Keep in mind that published returns are net of the expense ratio, so there is no need to subtract it. However, the returns do not account for any sales charges that are paid, so you do need to account for that. In the event that the funds seem about the same, go with the fund that has a manager that has been there at least 10 years. If both funds do, then choose the one with the lowest expenses.
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