When you invest in a mutual fund you are hoping to take advantage of several benefits afforded to mutual fund investors, the main benefit being the mutual funds professional management. There is no shortage of mutual funds on the market today, unfortunately in the world of investing there are many bad mutual funds. I tend to class bad mutual funds as funds that don’t even keep up the major stock indices like the Dow Jones Industrial Average and the S&P 500.
It would be unfair to say a mutual fund is performing poorly if it only breaks even, if the main indices were down over 20%. It’s all relative. The key is to research mutual funds using a variety of metrics in order to accurately gauge a fund’s performance.
Also, when trying to assess how a fund is performing it is important use as long a time period as possible. A few months may not be enough time to get an accurate picture of a fund’s performance, as the fund could be affected by short-term market volatility. One year is the minimum time period I would use, preferably longer.
How To Spot Bad Mutual Funds
One of the worst fund managers I have come across is Barry Ziskin. He runs the fund Z Seven (ZSEVX). In 2009 he managed to lose 31.37% of his investors money. In 2009 the S&P 500 rose by 26.46%. This is certainly the definition of a bad mutual fund. This manager clearly made some atrocious decisions. I’m certainly glad he is not managing my money, though I do feel for those individuals whose money he lost.
Bad mutual funds can lose money not only through faulty management, but you can also lose money through high fees and commissions. Both of these factors should be considered when analyzing mutual funds for potential investments.
I have personally invested in mutual funds, I timed it badly and chose a bad fund manager. This is, in fact, what prompted me to learn how to trade stocks for myself. Keep in mind that no matter how much training and education a fund manager may have, no-one will look out for your money as well as you will, and you must remain diligent in your financial management in order to maximize profits and minimize losses.
However, there are some good fund managers out there who have performed consistently well in the long term, but they are few and far between and quite often a little digging is required to find them. Due diligence is always a prerequisite to investing, even in the “easiest” of investment tools.
Avoid Bad Mutual Funds By Using A Mutual Fund Screener
One good place to start your search is the yahoo mutual fund screener. These work very similar to standard stock screeners, but obviously screen mutual funds rather than stocks. This stock screener allows you to research and compare mutual funds based on your preset parameters for investing.
When looking at mutual funds, I often find it useful to assess their correlation to the main index. Alternatively, if the fund is targeted to an individual sector, such as housing or energy, see how it compares to a related index such as the Dow Jones U.S. Oil & Gas Index (^DJUSEN). You can also compare a fund’s performance to other mutual funds in order to find the best performing fund.
In conclusion, I will just say that it is often wise to do a considerable amount of research when deciding on a fund to invest in, this can substantially reduce the risk of investing in a bad mutual fund. You definitely don’t want to invest in the next Barry Zishkin fund.