Mutual fund is one of the most popular investment vehicles in the market nowadays, generally it pools money from huge number of investors and diversify the investment into a number of selected stocks from different sectors, bonds, and other securities. It is so popular among average investors because it lifts the burden off of having to pick up some of the most important investment intelligence. This important task is then handed over to the fund manager who we hope that, can invest our money better than us.

However, even though managed by reputable investment firms, the best financial institution, or the so called expert of the field, still many mutual fund investors out there are not making much money, worse yet even more investors are still experiencing heavy losses. There are many reasons investors are not making money from mutual fund.

1. High Entry Cost and Annual Fee. Some funds charge as high as 6% at initial entry and 1.5 – 2% every year as administrative charges. This means that before you mutual fund even earning you some returns, you are down by 8%. In order to make any gain, the fund will basically have to perform at the rate of return of 8% or more.
2. Snapshot of Big Gain. It is common for investment firm to show spectacular gain of a specific period in order lure potential investors. What investors don’t realize is that the big gain shown in the mutual fund prospectus is captured during a booming period when the fund manager is chasing for some hot stocks in shorter term. This kind of gain does not last, and most probably it will go south when investors buy into the fund.
3. Limited Investment Options in Local Market. There are only a limited number of funds available in the market, in my context, the Malaysia market. Even there is only limited number of funds in Asian countries compare to the US market where there is probably more than 8000 mutual funds out there. Adding to the frustration, there are only a small number of funds that are performing, and if you are limited to only to a few choices, your chance of high return is low to none.  
4. Not Enough Information and Research Tools.  The single most important reason why investors don’t make money from mutual fund is because lack of information and knowledge of research tools. Average mutual fund investors can only pick funds that are presented to them by sales agents and the only information they can get about the fund is the prospectus that doesn’t show much useful information. Without knowledge of useful research tools and access to information of vast choice of mutual fund out there, one would have no choice but be bounded to limited losing choices. 

If you just decided to invest in mutual fund or have been making a loss, don’t lose hope yet because there is a better way you can pick the winning mutual fund. The best of all, what you are going to learn to use is totally free and accessible through internet!

1. Open your web browser and logon to www.morningstar.com. Look for Fund tab on the upper menu and click on it. Please refer to below screen shot.
2. Look for Fund Screener at the left panel of the web site. Clicking this will bring you to page where you can enter filters to obtain a list of funds with winning criteria.
   
3. Select your preferred type of fund from Fund Group. For the sake of example, I will leave it as All, so it will find fund from all categories.
4. Select 5 Years for manager tenure. This is to make sure only the funds with experienced fund manager will be selected.
5. For minimum initial purchase, it depends on how much money you can afford at the moment. For our example, we will just put $1,000 minimum.
6. Select No-load fund only for load funds. Select this to filter out any mutual funds that require entry cost and management fees.
7. Select 4 and 5 Morningstar Star Rating. Morningstar have their own system and measurements in term of rating a fund, to keep things simple, the more stars the better.
8. Select below than average for Morningstar Risk.
9. In term of return, select S&P 500 for 5-year return. This is to make sure whatever mutual funds found match the performance of S&P500 index for period of 5 years.
10. For total assets, select 1 or 5 billions. This is to make sure the fund is not too small to go bust easily and has enough capital to sustain itself.
11. If you have a targeted duration to realize the profit, select duration. In our case, we put 5 years length.
12. Now, by clicking show result, the next screen will display a list of short listed mutual funds that meet your criteria.
        

Analysis of Shortlisted Mutual Funds

As you can see from the screen shot, Morningstar returns mutual funds from very different categories and those rated with 4 stars and above. It also shows in the list the Year To Date (YTD) return in percentage and total asset for all the listed mutual funds. If you click on one of the fund, let say DFA Emerging markets with YTD return of 56%. This will bring you to quote page. Here, you can see a lot of information that is related to the fund. For example: the net asset value, change of value in day, load amount, a graph showing 10 years performance, trading range within a year, total asset under management, investment type, category, risk and return, etc.

Also in quote page, under Morningstar Risk Measures column, you can find out the risk and return of the mutual fund as compared to other mutual fund in the same category. In our case, risk is below average for the category, while return is above average compared to other mutual fund from the same category, this is a plus point.

Look under Performance column, it shows the performance of the fund for various period of time. In our interest, we look at 3, 5 or maybe 10 years performance. For DFA Emerging Market, the rate of return is 6.77%, 16.30% and 11.38%, which is doing quite well. Interest we get by putting money in bank fixed deposit is not even 3% nowadays.

Click to navigate to Rating & Risk page. This page will show you the Morningstar rating for the mutual fund in term of past invested period from 3 to 10 years or above. Besides, there are two key figures we need to focus on; Standard Deviation and Sharpe Ratio. Standard deviation is a statistical measure of the range of a fund’s performance. When a fund has a high standard deviation, its history shows a wide range of performance, indicating a greater potential for volatility. Simply put, the greater the standard deviation, the greater the fund’s volatility. The Sharpe ratio measures risk-adjusted performance by comparing a fund’s average monthly return to the average monthly return of a Treasury bill, which is a risk-free investment. Simply put, the higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance. In our case, the standard deviation and Sharpe ratio is 30.66 and 0.28. Although I would say 30.66 is quite high and 0.28 is quite low, so these points are not doing that well.

If you navigate to Management page, you can see the fund manager detail, biography, start date and so on. For this fund, Karen E. Umland has been managing the fund since 1997, which is more than 10 years. So we hope that she will continue to manage the fund and maintain or outperform the next 5 years.

To find out which investment firm to approach in order to purchase the mutual fund, simply click on Purchase and you will be brought to the page where there is a list of brokerage firms that are offering the investment product. As you can see in the same page, it also mentions free charges for various administrative efforts. However there isn’t really a zero cost fund around in the market, as they probably have already factored in the cost into your future gain, so you will need to read the fine lines before purchasing a fund. If the potential gain is not dampened much by the factored cost then it will be still fine.      

In order to find out which mutual fund is the best among the short listed, you need to establish a shorter list of the highest ranked mutual funds, type it down in an Excel document or write in a paper spreadsheet. For each mutual fund, find out the key figures and winning criteria that have been mentioned above. With the list prepared and the best fund determined, you are now better prepared to purchase your next winning mutual fund.