How to Calculate the Relative Strength of a Mutual Fund

by Owen Pearson

Mutual funds can serve as attractive investments, because you can use you investment dollars to invest in more than one fund. This can help you diversify your investment portfolio without the need to track each investment -- your fund manager will monitor the performance of each fund for you. However, determining the relative strength of a mutual fund is essential for investment success. Simple strategies can help you determine the relative strength of a mutual fund to maximize your potential to profit from your investment.

Calculate the six-month rate of change of a chosen index, such as the Standard and Poor's 500. You can calculate the rate of change by dividing the ending value by the beginning value. Convert the rate of change into a percentage -- for example, if the rate of change is 1.1, the index value has increased by 10 percent.

Determine the six-month rate of change of your chosen mutual fund by dividing the ending value by the beginning value. Convert the rate of change into a percentage.

Divide the six-month percentage of change of your chosen mutual fund by the six-month percentage of change of your chosen index. This will give you the relative strength of your mutual fund compared to the index. For example, if your mutual fund has grown in value by 14 percent and your chosen index has grown by 10 percent, the relative strength of your mutual fund is 1.4.

Tip

  • Factor in commissions and other mutual fund management fees when determining whether to invest in a mutual fund. Commissions and fees can decrease your investment earnings.

Warning

  • Seek the guidance of a licensed mutual fund broker before investing.

References

  • Mutual Funds for Dummies; Eric Tyson

Photo Credits

  • Spencer Platt/Getty Images News/Getty Images