Benjamin Graham, the father of value investing, once noted that making money on investing should depend “on the amount of intelligent effort the investor is willing and able to bring to bear on his task” of security analysis.
He went further to define the intelligent investor as an enterprising individual that has the time and energy to do his or her investment research.
In contrast to the intelligent investor is the defensive investor who would prefer to have another individual pick stocks, bonds and other financial assets on his or her behalf. Aside from the aforementioned, most of us are sitting on the fence but claiming to be investors but forgetting that we are just like someone wading through a flooded road with our eyes closed.
Considering the aforementioned and looking at the growing interest in mutual funds in today’s market, questions most analysts now try to provide answers to relate to when it is good to stake your money in this kind of financial asset.
Before that, what is a mutual fund? It is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. Mutual funds are most commonly applied only to those collective investment vehicles that are regulated and sold to the general public.
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Many personal finance experts believe that there are many metrics you need to study before deciding to invest in a mutual fund. In summary, financial experts say that when it comes to buying a mutual fund, investors must do their homework.
In some respects, this is easier than focusing on buying individual securities, but it does add some other areas to research compared to enterprising investors. But overall, there are many reasons why investing in mutual funds can make sense. In some instances it is the only choice available to investors, meaning it is indeed important to figure out how to buy the best ones.
“There is money to be made in mutual funds, but investors fall into several pitfalls that keep them from maximising their profits when investing in funds. Getting too focused on short-term results can be a big problem.
“As with individual securities, chasing performance can be a large negative when buying mutual funds. For starters, there is little evidence to suggest that a mutual fund manager that performs well for a quarter, or even a couple quarters in a row, has investment skill,” said William Baldwin, an investment analyst with Forbes.
According to him, “The only surefire way to determine if a mutual fund manager has more investment skill than luck is to measure his or her performance through a full market cycle of three to five years. A manager with a few bad quarters, but a great long-term track record, could still end up being a great mutual fund to buy into.”
He noted that investors also have a track record of chasing performance, a situation which can have significant impacts on mutual fund performance.
“Buying into a mutual fund following a strong short-term run and great performance is unlikely to be repeated unless the manager has a solid long-term track record. Fund flows can also end up hurting performance. Mutual fund managers in small-cap stocks can start to lag if they become too popular; with high asset levels it can become too difficult to find opportunities in smaller companies.”
Baldwin believes that rapid inflows and outflows can also hurt performance because the mutual fund manager may be forced to invest new funds or sell to meet redemptions, which means he or she is forced to make buy or sell decisions that may not be based on if a stock or bond is a good value at the current price.
