Question: If you could only buy mutual funds. How would you approach analysing them?

Hazem Abdel Fattah Hussein: Save the money monthly till you can buy etfs or stocks

Patrick Leduc: Fail – Technically you can buy stocks before a mutual fund. Mutual funds have a minimum invesment. Stocks don’t.

Dan Naumov: The only thing to analyse would be the fees as I would be buying very broadly diversified index funds.

Patrick Leduc: Yeh but to analyse just the fees doesn’t make sense. Assuming I would want to pay MER in the range of 2%. Paying 1.8% or 2.2% wouldn’t change the quality of the fund. I’m looking for more…

Sirius Canar Dar: Patrick Leduc Sure it does, assuming both funds get the same average long term rate, you would be paying 18% more fees, compounded annually. I’m not saying other metrics don’t matter, but your fees are definitive predictable loss rate, where as there is no sure way to predict future performance.

Patrick Leduc: Again. To analyze just the fees doesn’t make sense. Of course when you compare almost identical funds then you can consider MERs

Dan Naumov: You people obviously didn’t read my post in full, talking about MER above 1% shows it pretty clearly. Any and all mutual funds with a MER above 0,5% would be automatically disqualified for that reason alone.What part of “I would be buying very broadly diversified index funds” was hard to understand?

Patrick Leduc: Yeh that’s what I said. Analizing by starting with fees is like starting with market cap. You could potentially eliminate a very good prospect for no good reason.

Pablo Huang: Invest yourself

Patrick Leduc: Not the question.

Victor Huynh: Fees are a big portion, higher MERs are crippling. You would obviously look at past performance but you will obviously look for a significant alpha and the management style. More importantly, you’d look at your own risk tolerance and needs. You’re probably better off not buying a mutual fund, since most underperform in the long run, plus chances are slim you’ll be able to pick out the next Peter lynch or Schloss fund.

Patrick Leduc: Great! You’re on the right track… How would you analize them to find the next Peter/Schloss fund.

Victor Huynh: Patrick Leduc that’s a billion dollar question. If you’re talking about fund wise.. And to single out a metric. It would be alpha, a consistently higher alpha would mean the fund managers are able to one up their benchmark. But that’s not all the story…See more

Patrick Leduc: So once you have all their holdings within the mutual fund. Would you see if they are true to their investment style and fund objectives? Or perhaps look for someone who is bending the fund style to invest in good opportunities? Perhaps track the change in fund holdings to get a better idea of what they see as value?

Patrick Leduc: When I look at them, first I make sure they are not mimicking the index by comparing the holdings and industries to that of the index. As well as the historical returns vs the index.

Victor Huynh: Patrick Leduc well that’s really going to take a while to study and value all their holdings. By the time you finish, positions might already be traded. Also it depends on your own goals, what are you looking for? Like 10%? 20%? Well it depends what u…See more

Victor Huynh:…/for-starters-index-and…/

For starters: Index and ETFs investing in your 20s according to…

Patrick Leduc: Yes. I put them in an excel spreadsheet then pull the info from Bloomber that I usually use to analyze a single stock (Debt, BV, Cash…). This gives me an overall view of the funds investments based on criteria that has proven itself to me in the past on individual stocks. So I’m thinking if the fund is overall “undervalued” then we’re on the right track.

Victor Huynh: Even if a stack of undervalued stocks are found, they are not subject to your own decisions, they can be sold off cause of volatility or x reason. And here it, and even if a few are undervalued, their positions in most funds are probably not significant to have an impact even if they were to converge to intrinsic value. Plus most funds sell and buy new positions, so you need to account for that.

Allen Kaplun: I loathe mutual funds. Working stiffs basically contribute to a fund their entire career for average performance while the managers life high-flying jetsetting lives. Go into an ETF, CEF or Index fund instead. You’ll end up better off. What out for the expenses!

Patrick Leduc: Great. Now if it’s all you had available, how would you approach it?

Allen Kaplun: Patrick Leduc What do you mean if thats all you had available?

Patrick Leduc: I’m just isolating everything else. And looking at only mutual funds.

Dan Naumov: An ETF is a mutual fund that happens to be traded on a stock exchange. There is nothing inherently good in an ETF and nothing inherently bad in a mutual fund.

Patrick Leduc: An ETF owns options. A mutual fund owns the stock. In a massive credit crunch and etf could be disastrous. Especially a bond ETF.

Manoj Garg: Consult an Advisor

Patrick Leduc: lol! So you would consult an advisor?

Manoj Garg: Definitely…if i intend to buy & dont have knowledge about mf.

Patrick Leduc: Ok. We both have enough knowledge. How would you rip a mutual fund appart to study it.

Manoj Garg: Many parameters, but for me – my fund shud deliver Returns alongwith asset quality.

Daniel Mayo: I would buy the lowest cost all-world index fund available. The effort required to effectively analyze mutual funds relative to the potential return makes it not worth it to me.

Michael Morse: I bought a mutual fund once….by accident. I thought it was a preferred. I held it for about 1 week, was able to scalp a few bucks out in the process.

Patrick Leduc: Actually they can’t really be traded. You get charged fees for excessive trading. And when you buy them they are bought at the next closing price.

Michael Morse: Well…i bought a blackrock fund a few years ago and my order was purchased at that current price and i got the price i wanted when i exited. I didn’t have to wait a day.

Michael Morse:

Michael Morse: It looked like a BAC preferred since i was collecting all of them at that time i didn’t bother to look at this symbol closely.

David Geof: look at their top 10 holdings (these normally consist of 60-70% of the fund). Then analyse these companies individually….and most importantly try to understand the fund’s cost structure (although good luck with that)

Michael Morse: Mutual funds have charts….now they don’t like it if you trade mutual funds….but if nobody had a choice….i’d bet they’d look like the rest of the casino.

Fung Chee Fui: While I think buying index funds makes sense, it’s more appropriate to actually answer your question.Fee is the obvious factor as others have pointed out. Track record is the other one, pay attention to the fund manager(s) of the specific fund and google about him.But I have a very unconventional way of selecting mutual funds: pick the small ones. Funds with huge fund size typically have difficulties in finding undervalued gems, they can only buy large-cap stocks which are mostly, if not all, efficiently priced. What big-size mutual funds do is what people called “closet-indexing”, and if so, you’ll be better off just buy index fund.Bottom-line: look for low fee, great manager, and small size. If these criteria aren’t met, just buy index funds.

Patrick Leduc: Agreed. If a manager is willing to only have minimal stocks in his fund he’s worth taking a look at.

Allen Kaplun: Here’s the paradox with Mutual Funds: When they have a stellar year, the managers get poached by other funds. Maybe track successful fund managers that recently get hired by beaten down funds?

Guille Ggh: Buy berkshire, it still is reasonably priced. Otherwise go for the lowest fee equal weighted S&P etf. Try to compare etf fees and the likes.

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Patrick Leduc: That wasn’t the question.

Guille Ggh: Get a Morningstar subscription (they likely have a 2 weeks trial). Morningstar was founded exactly to provide mutual fund and ETF research to retail investors. While i have not really looked into it, their equity research is decent (for the price point). You could just read their mutual fund research articles and try to emulate their analytical framework on your own.