Beware Incomplete Mutual Fund Information

by James & Miel on June 11, 2009 · 0 comments

Despite the recession, some of you may be looking to buy mutual funds. Provided you can scrape up the cash and are willing to brave the market, you may be wondering about the quality of the information thats available to you. Well, here are some thought to keep in mind when reading the financial media.

1) Pay to Play: Its a despicable practice, but many of the major finance news organizations do “pay to play”. This means that financial companies who want to promote funds will pay publications to feature their products. Sometimes a substandard mutual fund makes it into mainstream publications because somebody is being paid, not because the fund is good. So if you see a fund in a publication that otherwise is a poor value, it might be because of pay to play.

2) Not Enough Information: Very often in advertisements in financial media you’ll see one year or three year return rankings. This is a problem because the performance of funds can fluctuate wildly between years. For example, if you looked at how well a fund has done over the past three years only using the 3 year info, you might get a distorted picture of the funds performance. For example, there might have been a recent stock market bust – or boom, thus distorting the performance of management. Really you need the annualized return over the life of the fund to get a sense of how well its actually performing.

The Kiplinger chart below is better because you can see the 1 year, 3 year and longer than 3 year returns. This gives you a better long term sense of the fund’s performance.


3) Most Fund Information Ignores Taxes: The vast majority of mutual fund information available ignores the impact of your tax situation. This is a problem because of portfolio turnover. Fund managers are forever chasing performance, this means when they sell to lock in a profit you might occur some taxable gains. For most investors, this isn’t such a big issue. It’s not the best play to help you build and preserve your wealth. Not taking taxation into consideration always will affect your ability to preserve wealth. But, when looking at a fund’s statistics, you should get at least a sense of the portfolio turnover, lest you unexpectedly get hit with capital gains.

So, a couple of major reasons mutual fund information gets confused in the mainstream press is that the information is complete or is confused with advertising. Shoppers should adjust accordingly.

Thanks,

James

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