While there are many ways to evaluate funds, the biggest mistake I see is that most people tend to overcomplicate things. My advice is to keep it simple and follow Michelle’s ABCs of evaluating funds to avoid costly mistakes.
A – Always check the fund’s expense ratios. Your goal should be to keep your costs as low as possible. Expense ratios are an important component and a simple measurement to keep costs in check. Although it sounds like a no-brainer, many investors often fail to review this figure.
B – Be clear on the fund’s objectives. The prospectus is an often underutilized reference tool that contains valuable information. If you read nothing else in it, be sure to find out what the fund’s objectives are. This gives you a clear path to track its performance relative to the appropriate peer group and benchmark.
C – Chasing returns is a losing game. This is an easy trap to fall into for the investor without a solid game plan in place. You’ve got to look at the big picture. Don’t jump into a fund only because of past performance. You run the risk of buying high with the rest of the herd.
Disclosure: This is just the ABCs. Every investor should have a thorough plan when evaluating funds.