Rational selection of bond mutual funds and equity mutual funds -- overview
Given the extremely large variety and number of available fixed income and equity investment funds, investors need a rational basis to select among them.
Without scientific selection criteria and a good understanding of which factors are more or less likely to increase risk-adjusted returns, investors will make erroneous decisions based on false assumptions.
Most individual investors want to select bond and equity mutual funds and exchange-traded funds to hold for a long duration. Many would also like to invest additional amounts automatically into these funds over time. These investors are less concerned about short-term fluctuations than about their longer-term capital appreciation goals. In addition, they hope to choose equity mutual funds with exceptional performance and to avoid funds that consistently trail the pack.
Such investors want to use mutual screening or selection criteria to identify better funds and to minimize the need for frequent changes due to inferior performance. Individual investors are better served, if they understand what the scientific investment literature says about potential selection criteria. Therefore, a series of articles The Skilled Investor discusses certain fund selection indicators that have a firm basis in scientific investing.
These articles discuss valid fund screening / selection criteria:
- Avoid mutual funds with sales commissions and 12b-1 fees
- Choose mutual funds with lower investment management expenses
- Avoid mutual funds with higher investment portfolio turnover
- Avoid very large actively managed mutual funds
- Choose sufficiently mature mutual funds
- Choose mutual funds with a minimum economical portfolio size
- Evaluate historical investment performance, but only after using other investment screening criteria
Screening criteria also need to be available in fund screening applications that are supported by up-to-date data sets.
These related articles may also be useful to you:
- Excessive investment costs are a huge problem for individual investors
- Beware of large and hidden mutual fund costs
- How much do hidden mutual fund trading expenses cost you?
- Invest in fixed income securities through bond mutual funds with low investment fees
- Is it worth paying higher bond mutual fund management fees?
- Passive individual investors are “free riders” who benefit from the higher costs of active traders
- The investment industry is not your investment partner
- What is the cost to investors of sub-optimal diversification?