How to Compare Two Mutual Funds

by Julie Mayfield, Demand Media
    More than 50 million U.S. households own mutual funds.

    More than 50 million U.S. households own mutual funds.

    Investing in a mutual fund is an easy way to make your hard-earned money work for you. Mutual funds are one of the most common ways of investing, too. More than 50 million U.S. households -- and nearly a third of households with someone 35 and younger -- owned mutual funds in 2010, according to the Investment Company Institute. It's important to find the right mutual fund to help you get where you want to go financially. Rates of return get most of the attention, but when you're comparing two mutual funds, there are many other factors to consider.

    Step 1

    Find out what kind of investments each fund is using. Most people think "stocks" when they think of mutual funds, but not all funds are invested in equities. Besides stocks, mutual funds may invest in bonds, government notes, or even precious metals. Examine mutual funds from the same category for an apples-to-apples comparison.

    Step 2

    Contrast the returns of the two funds you're comparing. Look at the returns over a variety of time horizons, including the past year, the past five years, and the lifetime of each fund.

    Step 3

    Evaluate the volatility of the funds. To do this, you’ll need to channel your former statistics teacher and look at the standard deviation of each fund. The deviation tells you how much the rate of return for specific time periods has varied from the fund's average rate of return. Beta is another volatility measurement that indicates how much the fund reacts to market changes. For both standard deviation and beta, the smaller the measurement, the less volatile a fund is.

    Step 4

    Research how the funds are managed. Evaluating fund management is less straightforward than other mutual fund measurements. Find out if the funds are managed by individuals or a team, and how long each manager has been with the fund. A high degree of turnover or a poor management reputation can mean unnecessary investment risk for you.

    Step 5

    Look at each fund's fees and expenses. Some mutual funds charge fees for buying, selling and exchanging shares. These can include "loads," which are sales fees. Even a fund that doesn't charge transaction fees has costs associated with running the fund. These costs, usually paid with fund assets, are more hidden but cost you money nonetheless. Mutual fund fees and expenses can't be eliminated, but choosing a fund with a lower cost can save you money and increase the return on your investment.

    Step 6

    Be aware of each fund's tax consequences. Most people know they'll owe taxes after selling shares of their mutual fund for a gain. Fewer investors realize that the tax man may come calling if a fund contains dividend-paying stocks, or if certain stocks inside the fund were sold for a gain by the fund's managers.

    About the Author

    Julie Mayfield began her freelance writing career in 2006 and has written extensively for eHow. She is also the Business and Entrepreneurs Feature Writer at Xomba.com. Julie has a Bachelor of Science in business administration from the University of Kansas.

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