How to Choose Mutual Funds

Mutual funds! How do you choose among the many options? Can you just pick them up from shelves in a store, read their labels, and put them in your basket of investments? Probably not. But in a way, you can.

I have compiled below what I have read so far about how to choose mutual funds. These come from different sources and I have weeded out what I think do not apply to to the Philippine market. Compared to learning the stock market behavior, this topic is relatively easier to absorb. So read on...

1. Read up. Keep learning. Read my blogs or any material that can carry past what you're learning here. Knowledge is power. And knowing is half the battle.

2. Settle on a suitable asset allocation. After you drew up your battle plan for investing (determined your risk tolerance, growth strategies, etc...), purchase your funds according to this strategy. It would come out pretty useless if you would just ignore this plan wouldn't it?

3. Discover the many research tools that are readily at hand. Ok we have books, magazines, newspapers, the internet. Everything is there. Look for fund performance, rankings, etc...

4. Check on no-load. These so-called loads, only mean commissions. There is one no load mutual fund I know in the Philippines and that is the Prosperity Money Market Fund. Performance-wise though, I see no growth there. 3.88% on the 3 Yr. Investment Return makes almost no difference to a time-deposit.

5. Look for funds with low annual expenses. You really have to check this out. This could be eating up your profits. Please make sure your fund performs well enough to cover the expenses and outperform the index fund over a long period of time.

6. Look for fund managers who have been in place for at least 5 years. Managed funds are run by people not computers, and you have to know who these people are. When the top stock picker leaves, so does the talent that goes with him/her. Or make sure the team left is well-trained by these investment wizards. Team-managed funds are normally managed by a real shot caller. This person must be identified at all costs. Hehe. Stick with funds whose lead managers are specifically identified.

7. Look for superior prior performance. Previous good records aren't predictive themselves. But this is an indication that the manager is good. Your quarry is always the manager not a particular fund.

8. Compare the fund with its peer group. The fund should outperform its peer group as well as a general market average.

9. Check for consistency of investment style. Style is defined by the kind of stocks or investments it invests in. You want them consistent. What they say in the prospectus should always be what they should do in the real world.

10. Consider the Fund's Size. It's size should be congruent with its investment goals. Managers sometimes announce that they're going to close their funds. That's no time to buy. It simply means the fund has attracted more new money than it can handle, which means performance might fall off.

11. Check the fund's performance in down markets. Some funds drop further than the general market average, then spring back - growth funds. Others go down less but may not turn up fast - value funds. Are you daring? Conservative? Choose the funds that makes you happier.

12. Check the minimum investment. Here in the Philippines. Some start at Php 500. Others at Php 10,000. Choose your pick. Be practical. What can you realistically afford? Additional investments you want to purchase can then vary per fund.

That wraps it up for now.