Choose Mutual Fund Based On Own Objectives

Q. How do you select a good mutual fund?

K.P., Spokane

A. The most important step in selecting the right fund for you is to first determine your investment objective (the reason you want to invest). With more than 5,000 funds to choose from, the list needs to be shortened by finding several that fit your particular needs and desires.

To get satisfactory performance you must first write down your objective in three sentences or less, then find a short list of funds that match. If a fund’s objective and management style suits you, you will be happy with the results - or at least prepared for the ride.

You will want to avoid negative surprises, so a careful review of the funds’ objectives and investment policies is a must. These sections are in the prospectus, which you should read before investing.

Avoid managers who seek to enhance performance by using various hedging techniques such as derivatives and futures contracts. These devices are highly speculative and some managers hope to rise above the crowd by placing successful bets. Not all bets are winners, and that’s YOUR money at stake. A plain vanilla portfolio will give reasonable results in all markets.

The local library has the Morningstar mutual fund guide in the financial section. This guide has performance and background information on all funds and can be used to select funds that fit your objectives.

Remember the best performing funds with your objective do not necessarily represent the best investment for you. Read the investment policy section of the prospectus. Unless you are a seasoned, aggressive investor with high risk tolerance, discard the cowboys who want to become famous by using speculative devices.

Another key decision; determining whether to buy load or no-load funds.

If you want help in selecting your fund and you are willing to pay a sales person to assist you in the the selection process, then you might consider load funds. In many cases good management can help you earn back the extra fees associated with load funds.

On the other hand, avoid most so-called “in-house products” packaged by the sales person’s own firm. There may be conflicts of interest which could work to your disadvantage.

No-load funds do not carry sales commissions, meaning a no-load fund with the same performance as a load fund will earn you more money. However, a no-load fund with a bad manager could be worse than a load fund with a good manager.

Vern Clemenson

Investors National Corp.

Q. I have a mutual fund to which I make monthly additions. I know that when a fund goes ex-dividend the net asset value of the share decreases and my account is credited with x shares.

My question: Is there any financial gain/loss derived by purchasing shares just before ex-dividend date or just after ex-dividend date?

T.M., Spokane

A. There is no gain or loss when you purchase shares just before or after the ex-dividend date. There are other factors to consider.

There is a negative to investing just prior to the ex-dividend date. You have a taxable gain with no gain in value. However, this gain will be offset later on, at the sale of the shares, because your taxable cost basis is directly increased in the amount of the taxable gain.

This information should not influence your decision to purchase shares on a monthly basis, but could influence a one-time lump sum purchase. It should be only one of many factors in making that decision.

Madeline Buescher, CFP

IDS Financial Services

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