Posted by: Lauren Young on January 19, 2006
Every week I make a regular appearance on CN8, a station for Comcast cable subscribers that reaches much of the East Coast. Since it is a morning show, the mood is light and breezy. Today’s topic was picking mutual funds.
To play off my recent BusinessWeek Mutual Fund Scoreboard Update (“Funds, the Easiest Way to Find The Best”), the CN8 producer came up with the kitschy idea of showing viewers how a mutual fund portfolio is constructed like a balanced breakfast. The example she picked was American Funds AmCap Fund.
Thus, here is how I described some of the fund’s top holdings on not-exactly national television:
Best Buy: Bacon
Capital One: Toast
(Since the Target logo looks like an egg, it makes perfect sense to let Target play the role of the eggs. But I would have assigned Google to the role of juice, and put Microsoft in the coffee slot.)
Incidentally, the producer also decided that the dinner menu should feature a tech fund. Her menu pick was T. Rowe Price Global Technology, and her casting included:
Intel: String beans
Texas Instruments: Rice Pilaf
Qualcomm: Dinner roll
Okay, so it's a little hokey--does anyone above the age of 5 actually drink milk at dinnertime? And how would Michael Dell respond to being called a chicken? But you've got to give my producer some credit for her creativity.
Kitsch and hookiness aside, the meat and potatoes part of picking funds is this: When buying a mutual fund, consider performance, expenses and manager experience.
1) Performance: You hear over and over again that past performance is no guarantee of future results. That’s true, but still track records matter. You want to find a mutual fund that’s done a good job of navigating the markets. A fund doesn’t have to have chart-topping performance, but, ideally, it should be above average.
2) Expenses: You pay a percentage of the fund’s assets to own the fund which is known as the expense ratio. The average mutual fund has an expense ratio of 1.4%, which means that for every $1,000 you invest, you pay $14.00 in expenses. I'm a sucker for a good deal, so it is always good to find a mutual fund with low expenses.
3) Experience of the fund manager: In mutual fund industry lingo, this is known as manager tenure. You want to see how long the manager has been running the fund, and what kind of experience they have.