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Rate 5 should not be the only factor you consider when you choose a mutual fund.
There are lots to talk about when choosing a mutual fund. In my opinion, several things you must consider:
1. Fund category: Large, mid or small cap, growth or value, domestic or foreign. You can not get it from Fund's name. Some large cap funds do invest in mid or even small cap stocks. Some growth funds do invest in value stocks. After you have some candidates, you need to read fund's report.
2. Fund investment style: Different funds have different style, they use different model to pick stocks or bonds. You need to find it out to see if the style fits your investment goal or risk tolerance. For example, Vanguard Windsor II invests in stocks that have low P/E but was beaten down recently. T. Rowe Price New Horizons invests in small cap stocks that have great earnings. Dodge & Cox International Stock Fund invests in large cap bargain foreign stocks and barely sells them, etc.
3. The cost of Fund: Load or no-Load, Expense Ratio. The cost of fund can have major impact on your returns. Usually the lower the better. But sometime, you want to pay more if it is a great fund or it invests in certain areas that other funds barely offer. However, in my opinion, I don't like to buy load funds or any funds with expense ratio above 1%.
4. Fund manager: You want an experienced manager to manage your money. You want to see the manager has good records or history. And be consistent with his performance in up and down market. I would like to find another Peter Lynch to be my fund's manager although it is hard these days. If the fund changes its management team a lot, it is a bad sign. For example, if I want to buy a Intermediate-Term Bond fund, I would definitely consider bond super star William H. Gross managed Harbor Bond Instl (HADBX). His style helped his fund to avoid most recent junk bonds melt down.
5. Performance: I don't quite worry about fund's performance. If I take care of above 4 factors, fund performance usually is in top 10 to 20% of all funds within the same category. But I do care about it. I want to see a fund that has good records in both up and down market. And the performance is consistent throughout its history. Chase an one year performance is not a good thing. You can check fund performance rating in up and down market at www.forbes.com .
6. Morning Star Rate: The rating is just a reference. The rating might be high for a fund this year but might be low for another. Usually 4 or 5 star funds are good funds. But you need to do some homework.
This book will help you a lot when choose a mutual fund: http://www.morningstar.com/Products/Store_Funds500.html
You can find it in library. It describes in details about all the items I listed above and also with morning star analysts comments.
Also you can reference to money magazine's picks: http://money.cnn.com/magazines/moneymag/bestfunds/2007/actively.html
There are lots to talk about when choosing a mutual fund. In my opinion, several things you must consider:
1. Fund category: Large, mid or small cap, growth or value, domestic or foreign. You can not get it from Fund's name. Some large cap funds do invest in mid or even small cap stocks. Some growth funds do invest in value stocks. After you have some candidates, you need to read fund's report.
2. Fund investment style: Different funds have different style, they use different model to pick stocks or bonds. You need to find it out to see if the style fits your investment goal or risk tolerance. For example, Vanguard Windsor II invests in stocks that have low P/E but was beaten down recently. T. Rowe Price New Horizons invests in small cap stocks that have great earnings. Dodge & Cox International Stock Fund invests in large cap bargain foreign stocks and barely sells them, etc.
3. The cost of Fund: Load or no-Load, Expense Ratio. The cost of fund can have major impact on your returns. Usually the lower the better. But sometime, you want to pay more if it is a great fund or it invests in certain areas that other funds barely offer. However, in my opinion, I don't like to buy load funds or any funds with expense ratio above 1%.
4. Fund manager: You want an experienced manager to manage your money. You want to see the manager has good records or history. And be consistent with his performance in up and down market. I would like to find another Peter Lynch to be my fund's manager although it is hard these days. If the fund changes its management team a lot, it is a bad sign. For example, if I want to buy a Intermediate-Term Bond fund, I would definitely consider bond super star William H. Gross managed Harbor Bond Instl (HADBX). His style helped his fund to avoid most recent junk bonds melt down.
5. Performance: I don't quite worry about fund's performance. If I take care of above 4 factors, fund performance usually is in top 10 to 20% of all funds within the same category. But I do care about it. I want to see a fund that has good records in both up and down market. And the performance is consistent throughout its history. Chase an one year performance is not a good thing. You can check fund performance rating in up and down market at www.forbes.com .
6. Morning Star Rate: The rating is just a reference. The rating might be high for a fund this year but might be low for another. Usually 4 or 5 star funds are good funds. But you need to do some homework.
This book will help you a lot when choose a mutual fund: http://www.morningstar.com/Products/Store_Funds500.html
You can find it in library. It describes in details about all the items I listed above and also with morning star analysts comments.
Also you can reference to money magazine's picks: http://money.cnn.com/magazines/moneymag/bestfunds/2007/actively.html
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