By: Jennifer Jackson - CIBC Wood Gundy
With more than 2,000 mutual funds sold in Canada, choosing which mutual fund to invest in can be difficult, even for the seasoned investor. But, by exploring the possibilities and deciding exactly what goals you have in mind, the choices can be narrowed down to a few funds, some of which are eligible for tax shelters like Registered Retirement Savings Plans (RRSPs). While there are no guaranteed techniques for picking a top performer in the mutual fund field, there are a number of trends an investor should examine before making an investment decision. Historical performance is a good way to judge how a fund has done. Although past performance is no indication of how a fund will perform in the future, it will reveal how a fund performed under particular market conditions. For example, some funds might perform well in strong, active markets, but not fare so well when the market takes a downturn. When reviewing the performance of a mutual fund, you may ask what is more important: short-term or long-term performance? Many investment professionals consider mutual funds to be long-term investments. But investors should also examine the fund's current performance as it may reveal some changes that could conceivably cause an investor to change or reconsider their investment. If may be difficult for the average investor to ascertain why the fund has taken a turn for the worse, despite all the research tools at your disposal. The answer might lie in the fund's quarterly report or with an Investment Advisor who would have data tracking the performance of that particular fund. While measuring the returns of comparable funds, an investor should also examine their risks, such as how stable the fund is. This is known as volatility and can be measured in two ways. The first, called standard deviation, shows the relative volatility of monthly rate of return. The second measure is a percentage figure that ranks the volatility of a fund within a group of similar funds. When making a decision about a long-term investment between two funds with similar performance levels, you should always evaluate your own individual circumstances and tolerance for risk and try and choose the one with the lower volatility figure. Performance consistency and your individual objectives are key when choosing a mutual fund. When a fund does well each year and outperforms the majority in bad times, then given your objectives, it could well be the best choice. Speak with an Investment Advisor for advice on how to select a mutual fund that's right for you and always remember to obtain a copy of the fund's simplified prospectus before making any investment decision.
While there are no guaranteed techniques for picking a top performer in the mutual fund field, there are a number of trends an investor should examine before making an investment decision.
