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Key Factors for Evaluating Mutual Funds

Price, Performance during different market environments, and Process are among the elements fund investors should consider

Karen Wallace 21 February, 2017 | 17:35
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If you're in accumulation mode--gathering assets for retirement--and looking to identify holdings for your portfolio, or to assess the quality of mutual funds or ETFs you already own, there are a few key things to consider. There are five areas that form the foundation of Morningstar Manager Research analysts' evaluations of funds, known as the Medalist ratings. We'll walk you through all these pillars to see how your fund picks work together in a portfolio.


Performance may be the first thing many people look at when evaluating a fund, but it certainly shouldn't be the only one. Unfortunately, looking at a fund's trailing return on a yearly basis or even over a longer period can only tell you so much about how a particular fund will perform. For the mathematically inclined, looking at a fund's mean return plus or minus two standard deviations over a certain period can give you a pretty good idea of the range of possible returns you can expect. But if your calculator isn't handy, you can look at a fund's trailing returns during extreme market conditions to get an idea of how aggressive or defensive the strategy is.

Let's look at American Century Equity Income Inv, for example, you can go back quite a while, and see how the fund has performed in a variety of markets. The years 2008 and 2009 can be very instructive, because they marked such a dramatic inflection point. In 2008, the S&P 500 lost 37% amid the financial crisis. In 2009, it rose 26.5%, as the equity market anticipated the economy's eventual recovery. American Century Equity Income lost "only" 20% in 2008. Of course, it's not nothing for a fund to lose a fifth of its value. But it lost less than almost every other fund in the category that year--it ranked in the first percentile.

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About Author

Karen Wallace  Karen Wallace, CFP® is Morningstar’s director of investor education.

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