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Mutual Fund Performance

To a layman's eye the judging and understanding of mutual fund performance is often complicated and frightening. With so much mass media advertisement, with headlines that scream: five star funds, Number One Fund, and other sales pitches we would believe that there are hundreds of mutual funds that offer great performance. Sadly for the investor this is just not true.

Past performance may be a good start in judging a mutual funds performance but things like small-, medium- and large -cap funds and their objectives, growth and the value or blend of the funds should be studied. Reviewing a company's past returns for five and even ten years and comparing with appropriate market index and other similar funds will be useful in determining performance as well.

To forecast whether a mutual fund will be a winner or not we have to research and ask ourselves if because it was a winner for past five years you must ask the question: "Will it continue to be one? The answer is no and to quote an old disclaimer used by many lawyers: "Past performance is no indication of future returns." It actually can be just the opposite and often good past performance can be associated with poor returns on investment in the future.

Analysts have a term they use called "efficient market hypothesis" that basically means that everything that is know, speculated about, suspected or guessed at has already been factored into the current price of the stock. So if the past were proof of an increasing value in a stock then it already has gone up and that affect is no longer viable.

To determine what funds to invest in you should by all means look at their performance records. You must also determine your own personal risk levels. Diversity is best and picked a varied portfolio you feel is within your comfortable risk factor. You have the option of either ignoring past histories and performance reports or betting against them. In a lot of circumstances it is better to invest in funds with falling prices or less than average prices as long as you understand the basic rule that the greater the projected return...the greater the risk.

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