Monday, July 20, 2009

How to passively choose a mutual fund

Soon after this site claims that mutual fund is one of the PASSIVE personal finance tools, it turns around and shows a past performance analysis where some of the best performed funds are choosen base on their prvious good returns. Looking at those numbers and charts, it doesn't seem PASSIVE at all !

What is going on ? What is the Right way to decide which fund to buy the passive way ?

The FIRST mutual fund article on this site had already mentioned the answer actually,

Choose Fund Manager,
Not the Fund !

Despite many justification of the high fee on mutual fund (general, vs stock fee), one must admit that Its FREE to save money in Fix Deposit and buying shares in stock market is cheaper. Mutual fund could be the MOST expensive personal finance vehicle.

So what are you paying for ? Why do you want to pay 5-6% UP FRONT in order to earn more money ?
Are you sure you want to pay the extra fee just because they did good in the past ?
Do you pay more just because you agree with the investment objective of the fund ?
How about just because a certain fund has some of the stocks you want to buy anyway ?
The agent is your friend, she did a great sale talk ?
Lets see what happen when you pay extra in other scenarios;
Sometimes I like to shop in a particular grocery store more than another even if some items are slightly more expensive. That is because the store owner is really friendly and knowledgable. He can answer most of my questions and I really don't mind letting him earn the extra cents.
If your ultimate goal in mutual fund is to earn more money passively without understanding the whole mechanism, then what you are really buying is your belief that the fund manager can do well with your money.

Choose Fund Manager,
Not the Fund !

The fund itself is pretty much a fix element, the objective is hard cast on stone. Past performance tells a lot but is really irrelevant to the future but future income is what you really care about. The environment could repeat itself or it may change. Either way, there is only one element that we can hope for to address all future unknown issues - the Fund Manager.

If the objective of a fund is met, its because the Fund Manager did a good job. If the good past performance continue, its because the fund manager is keeping it. If the bad past performance turns good in future, it is because the fund manager improves.

Without the trust on the Fund Manager, all other aspects carry less or almost no weight at all.

So that is it! Find out who the Fund Manager is, ask for a lunch date or read their reports to determine if this is the type of guys or companies you would trust your money with.

After you have found a fund manager you can rely on, just look through all the fund objectives and pick one that you understand most or have the highest hope for.