It's great to hear about an investment that is outperforming others; it really makes your ears perk up. Be careful about chasing performance in the world of mutual funds, though. Here are several factors you should consider when evaluating which funds should go into your portfolio.
Let's start at the top. There are two flavors of funds to choose from: index funds and actively managed funds. Index funds are designed to track the market index. What's a market index, you ask? A market index is a section of the stock market.
Think of index funds as a way to be on investment autopilot. They are not run by an active portfolio manager, so the expenses are lower. The less you pay out, the more you keep.
Actively managed funds have a portfolio manager who is calling the shots. The expenses are higher, and guess what? These funds tend to underperform their target indexes over time. Stay with me here; chances are, you are not going to get what you pay for because higher expenses translate into an overall lower return.
Insider Tip:
Because stock markets are inherently unpredictable, even seasoned fund managers have a hard time picking the right thing. Eighty-five percent of active mutual funds underperform their target goal.