Investigating Mutual Fund Vulnerability

Common sense in investing encourages consumers to diversify their portfolio as to help mitigate the overall risks of losing money on their principal. For decades, one of the most popular forms of investment instruments have been mutual funds.

Since mutual funds are already comprised of a mix of securities and assets such as stocks, bonds, property and the like, by putting assets into a mutual fund, investors are instantly diversifying their holdings.

Before taking the leap and investing in mutual funds, it is important for you to follow some due diligence procedures and investigate and weigh the potential risks a particular fund may have.

Although there are many tools and factors that can gauge mutual fund health and vulnerability, there are two outstanding clues that should be incorporated into any analytical strategy.

Tools for Mutual Fund Analysis

  • First, you need to break down and view the the results that the fund manager presents to explain why certain mutual fund reactions occurred. That process is called “attribution analysis,” and the questions such as how did marketing timing, added value, short term factor timing and security selection affect the fund should be considered.
  • Secondly, investors are also encouraged to use analytical software to make a comparison of a fund to its relevant indexes, or the process of analyzing a fund’s “sector weight.”  This factor can help predict the fund manager’s sector-specific behavior and can provide an investor with some valuable insight to the overall mutual fund. If it is a blended fund, you can see how it is diversified.

Legally, under Federal guidelines, mutual funds must disclose information about their investment structure, health, profits and losses to investors and make that information available to possible new shareholders.

Mutual funds issue prospectus information that can be readily accessed by those interested in investigating the mutual fund in depth. Just remember that despite a profitable history, that past performance of a mutual fund is in no way an indicator of its future success.