investing

Mutual fund prospectus primer

Check out fund management

The prospectus will tell you who manages the portfolio and how long the manager has been on the job. Some funds are managed by one person, others by a group.

"There is a certain strength to the group approach," Saulnier says. "The problem with an individual manager ... is that when that person leaves, it blows out the entire fund potential."

With a group of managers, even if one "star" manager leaves, the others can still maintain the continuity of the investment strategy.

As far as experience is concerned, Mecca says the more, the better. "I want someone who's been through it, has seen it and knows how to react to it," he says. "Somebody who just gets out of school and has one to two years of experience, that's a negative to me."

On the other hand, Randy Kurtz, founder and chief investment officer of BetaFrontier -- formerly RK Investment Advisors -- in New York, says a little freshness isn't necessarily a bad thing.

"There are two ways of looking at that," Kurtz says. "Experience is always good ... yet there have been studies that say that, on average, managers' best performances are early in their (careers)."

It's essential to know how long the manager or group of managers has been at a fund in relation to the period of performance you're evaluating.

"You need to make sure that the performance you're looking at is attributable to the people who are currently managing the fund," Kurtz says. "If they've only been on the fund for two years, you can't look at the five-year track record."

Note fees and expenses

The fund and its managers look like a good fit for your investment goals. Now you want to check out the price tag. A host of transaction fees and operating expenses may apply.

Shareholder fees, which are charged directly to the investor when a transaction is made, include:

  • Sales loads or commissions to brokers selling the fund. Can be paid upon purchase, known as front-end, or when the shares are redeemed, or back-end.
  • Redemption fees, paid to the fund rather than broker to defray the cost of redeeming shares.
  • Exchange fees. Charged when shares are transferred to another fund in the same fund group.
  • Account fees. Typically incurred for account maintenance if a minimum balance is not maintained.
  • Purchase fees. Paid to the fund to defray the cost of purchasing shares.

 

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