Skip to headerSkip to main contentSkip to footer
Get our Free E-newslettersGet our Free E-newsletters
Kiplinger logoLink to homepage
Get our Free E-newslettersGet our Free E-newsletters
Subscribe to Kiplinger
Subscribe to Kiplinger
Save up to 76%
Subscribe
Subscribe to Kiplinger
  • Store
  • Home
  • Investing
  • Retirement
  • Taxes
  • Personal Finance
  • Your Business
  • Wealth Creation
    • Podcasts
    • Economic Outlooks
    • Tools
    • Kiplinger's Personal Finance Magazine
    • The Kiplinger Letter
    • The Kiplinger Tax Letter
    • Kiplinger's Investing for Income
    • Kiplinger's Retirement Report
    • Store
    • Manage My E-Newsletters
    • My Subscriptions
Skip advert
  • Home
  • investing
investing

How to Be a Better Fund Investor

Yes, we live in trying times, and investors should be concerned about a feeble economy and volatile, often irrational markets.

by: Nellie S. Huang
January 1, 2012

Thinkstock

Skip advert

Yes, we live in trying times, and investors should be concerned about a feeble economy and volatile, often irrational markets. But now more than ever, we need to shunt aside emotions and approach our investments with logic and detachment, and take a long-term view. By understanding the fundamentals of fund investing -- knowing how to buy and when to sell -- you can be a better investor in any market.

Skip advert
Skip advert
Skip advert

1 of 9

How to Buy: Get the Right Fund for Your Goals

Thinkstock

Skip advert

Funds come in a number of broad categories -- stocks, bonds, money markets, hybrids and alternative investments, such as commodities. Each category is subdivided into more-specific groups -- for example, stock funds may focus on small U.S. companies or large foreign firms. In general, the more a fund is oriented toward stocks, the riskier it is and the greater the potential for reward.

Skip advert
Skip advert
Skip advert

2 of 9

How to Buy: Check the Record

Thinkstock

Skip advert

Look at long-term results -- at least five years’ worth, preferably ten. Compare the record with a benchmark and the category average. Be wary of an advertising claim that a fund beat this index or that peer group over the past one, three, five and ten years. One recent blockbuster year can skew that kind of analysis. And check to see that the same manager was in place over the entire period.

Skip advert
Skip advert
Skip advert

3 of 9

How to Buy: Keep Costs Down

Thinkstock

Skip advert

Fees eat away at your returns. Put $10,000 in a fund that grosses 10% yearly and charges 1.5% in fees and you’ll have $49,725 after 20 years. But if the fund charges 0.5% a year, you’ll have $60,858. Compare a fund’s fees with those of other funds in the same category. The average annual fee for diversified U.S. stock funds is 1.32%, for example. Avoid sales charges, too.

Skip advert
Skip advert
Skip advert

4 of 9

How to Buy: Make Sure You Can Live with a Fund’s Risk

Thinkstock

Skip advert

Generally, the greater a fund’s volatility, the greater its potential reward. Be sure a fund’s returns have been commensurate with its risks and that you can sit through the inevitable downdrafts without flinching. A big problem with high-risk funds is that they attract many investors after they soar. Those investors then sell after the fund craters.

Skip advert
Skip advert
Skip advert

5 of 9

When to Sell: Your Manager Splits

Thinkstock

Skip advert

If you own an actively managed fund, the person or group of people in charge is key. This is especially true at smaller firms that are intimately tied to one manager, such as Yacktman Fund and Don Yacktman. It’s less important at large companies with deep benches, such as Fidelity and T. Rowe Price. A manager’s departure shouldn’t be an automatic trigger to dump a fund, but it should raise a red flag.

Skip advert
Skip advert
Skip advert

6 of 9

When to Sell: Performance Turns Stinko

Thinkstock

Skip advert

Selling for performance reasons is tricky. Even the best managers periodically hit a dry patch for a year or two. But if a fund persistently lags its benchmark and peer group -- three years in a row, say -- it may be time to put your money elsewhere.

Skip advert
Skip advert
Skip advert

7 of 9

When to Sell: The Fund Changes Its Stripes

Thinkstock

Skip advert

Those small-capitalization stocks a fund bought years ago may have graduated to mid-cap or even large-cap status.

Or a manager may have made a conscious decision to shift the fund’s focus. For example, Fairholme Fund morphed over the past year into something akin to a financial-sector fund.

So check out a fund’s current investment style at Morningstar.com, with an eye toward how it fits in with your portfolio. If a fund is no longer a good fit, consider selling.

Skip advert
Skip advert
Skip advert

8 of 9

When to Sell: Assets Explode

Thinkstock

Skip advert

The bigger a fund, the less nimble. This is especially problematic for small-cap stock funds -- as the fund trades shares, it may move the stock price in a way that hurts results. But asset bloat can hinder large-cap funds, too. Fidelity Magellan posted stunning gains in the early ’80s, but performance started to peter out as assets surged.

Skip advert
Skip advert
Skip advert

9 of 9

More from Kiplinger

Skip advert

SPECIAL REPORT: Be a Better Investor

Build a Better Portfolio

Be a Better Investor

Kiplinger's Guide to Investor Psychology

SLIDE SHOW: How to Be a Better Bond Buyer

SLIDE SHOW: How to Be a Better Stock Investor

Skip advert
Skip advert
Skip advert
  • mutual funds
  • investing
Share via EmailShare on FacebookShare on TwitterShare on LinkedIn
Skip advert
Skip advert
Skip advert
Skip advert

Recommended

Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to
investing

Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to

More flexibility, more control, the potential for higher returns and tax-reducing strategies: With pros like that, could direct indexing be right for …
June 25, 2022
Janus Henderson Global Equity Income Fund Hangs Tough
Kip 25

Janus Henderson Global Equity Income Fund Hangs Tough

A focus on dividend payers and defensive stocks has kept the Janus Henderson Global Equity Income Fund afloat in a rough market.
June 23, 2022
Ron Baron: A Fund Legend Shares Stock-Picking Secrets
mutual funds

Ron Baron: A Fund Legend Shares Stock-Picking Secrets

The ability to buy and hold great growth companies for the long term is important to becoming a successful investor.
June 22, 2022
Baron Funds: The Masters of Growth Investing
mutual funds

Baron Funds: The Masters of Growth Investing

The Baron Funds have an extraordinarily long and successful track record. Here's how they do it.
June 22, 2022

Most Popular

8 Money Tips for Seniors Suffering from Inflation
Inflation

8 Money Tips for Seniors Suffering from Inflation

This year has been an especially tough one for seniors on fixed incomes. To stay on track, try these eight financial survival tips.
June 26, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022
  • Customer Service
  • About Us
  • Advertise With Us (PDF)
  • Privacy Policy
  • Cookie Policy
  • Kiplinger Careers
  • Accessibility
  • Privacy Preferences

Subscribe to Kiplinger's Personal Finance

Be a smarter, better informed investor.
Save up to 76%Subscribe to Kiplinger's Personal Finance
Do Not Sell My Information

Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site www.futureplc.com
© Future US LLC, 10th floor, 1100 13th Street NW, Washington, DC 20005. All rights reserved.

Follow us on InstagramFollow us on FacebookFollow us on TwitterConnect on LinkedInConnect on YouTube