Evaluation Tools for Mutual Funds

by Valencia Higuera

If you're thinking about investing your money, you can choose from several investment strategies. There's the option of investing in stocks or bonds, or you might increase your income with a high-yield savings account, such as a money market account. Another option involves pooling your funds with other investors and investing in mutual funds. A money manager handles this type of investment. Before investing your funds, it's imperative to evaluate mutual funds.

Volatility

Evaluating a mutual fund's performance involves assessing how drastically the fund deviates or changes over the course of time. Volatility and change are typical with mutual funds, and the rate of return on investments will fluctuate. Deviation is best described as the difference between projected and actual returns on your investment. Mutual funds with a high deviation or volatility are considered risky investments. A sudden shift or change can radically decrease your rate of return within a short time frame.

Research the Dividend Yield

Talk with your money manager and ask for information on the mutual fund's dividend yield. This is a ratio or number that calculates how much the company pays in dividends comparative to its stock price. Dividends are funds paid to shareholders or investors based on company profits. Money managers determine the dividend yield by dividing the yearly profit by the company's stock price. Acquiring this figure is key to evaluating mutual funds because it provides insight as to whether the mutual fund will create steady income over a length of time.

Beta

Paying attention to a mutual fund's beta is another tool for evaluating the potential strength and profitability of a mutual fund. Beta numbers indicate risk, and, according to The Variable Annuity Life Insurance Company, a market's average is typically around 1. Mutual funds with betas higher than 1 are more volatile and riskier, whereas mutual funds with beta indexes less than 1 are less volatile. A mutual fund with a low beta index might appeal to conservative or cautious investors, because these mutual funds are less likely to decline in value.

Compare Returns

Do not select a mutual fund based solely on recent return numbers. Choosing a profitable mutual fund requires evaluating the mutual fund's performance over an extended period. Acquire data and statistics related to the fund's performance from a money manager. Assess the value of the mutual fund over a lengthy period of time. Inquire about capital gains, interest and dividends for a period of no less than three years. Evaluating these factors helps determine your possible rate of return with the fund.

About the Author

Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.

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