Quoted: Besides 5 and 10 year returns, expense ratios, load/no load, risk, and manager tenure, what else should I look for? |
historical returns should only be consulted for "go anywhere" broad market funds. picking a fund soley based on recent past returns is a sure way to underperform in the future.
note that using historical returns can mislead you. in fact, you should strive to buy whatever is currently out of fashion. eventually, it will come around. one way to do it is to consult the following two charts...
periodic table of investmentsanother periodic table via a very long linkother things i would look at when looking for a fund:
- where is your investment portfolio heavy right now?
- where is your investment portfolio light right now?
- what is the
style box of the fund and how does it fit with above?
- how far in the future do you expect to need the money?
see, for example, the 2nd post in
www.ar15.com/forums/topic.html?b=1&f=133&t=531982also see
www.ar15.com/forums/topic.html?b=1&f=133&t=514490
Quoted: If a fund has had a 10% return rate, does that mean that an investor will have actually realized a 10% increase on his investment (before capital gains tax), or are there other deductions from that figure? |
some of the information presented above this post is slightly incorrect. if a fund company advertises a 10% historical return, they are talking about "total return net of expenses". total return thus includes capital gains and dividends and any other ways they made money (swaps, hedges, etc), less expenses. hence it is a reasonable indicator of how the fund did. note that because a mutual fund must pass-through taxes, the way that the return is presented back to you is instrumental in what *your* after tax return looks like. read on.
Quoted: Are all the expenses included in the expense ratio, or are there "hidden" expenses, and how does one uncover those? |
for no-load funds without a 12b-1 fee, the ER encompasses the total expenses of the fund. the ER is figured into and subtracted from the total return. note that some funds impose an early redemption fee (typ. 30, 60, or 90 days) to discourage frequent trading. IMHO this is a good idea as frequent fund trading, besides being counterproductive for the "trading" investor, increases costs for everyone else who owns the fund as well. so, do not be discouraged about funds with short term redemption fees -- this is the fund company looking out for you, the long term investor.
at this point in mutual fund evolution, there should be very few reasons for you to buy anything with a load nor anything with an ER above 1%.
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the biggest "hidden" expense w.r.t. mutual funds is selecting inappropriate investments in a taxable account. since long term capital gains are taxed at 15% vs dividends at your marginal tax rate, you(*) should strive to avoid dividend-paying investments in a taxable account. there are many funds that are specifically constructed to be as tax efficient as possible -- look into these for use in taxable accounts. ETFs are also highly tax efficient. at the other end of the scale are bonds and REITs -- very tax inefficient.
of course, in a tax-advantaged account (IRA, Roth IRA, 401k, 403b, TSP), you can buy mutual funds at will as the IRS will not be dipping into your pocket at the end of the year.
ar-jedi
(*) assuming you are not yet retired and are looking for capital appreciation rather than income.