Step-by-step process of picking a fund that just might turn dimes into dollars; Your Funds


NOT LONG AGO, I changed the way I pick mutual funds.

There is no perfect way to pick mutual funds. The best research and methodology don't always deliver the best results. A personal selection system doesn't guarantee success either, but it should lead to investments that make you happy over time.

The changes in my system in the three years since I started writing this column result from what I continue to learn about funds.

Following are the steps I go through before buying a new fund. Use my process to help develop and refine your own.

Determine why I want or need a new fund.

Picking a fund starts from within, where I decide what I want this money to accomplish. That sets my goals and expectations.

That means no impulse buying, no chasing hot funds and, in short, no moves that don't fit a bigger strategy.

It also keeps me from staying with laggards and unnecessarily complicating my life. I don't need two aggressive-growth funds. If this money is to be managed for fast growth, I can add it to my existing fund; if I have lost faith in my current selection, I should be making a change.

Find funds that meet my needs.

If I want or need a new fund, I can quickly pare the field by sticking to funds that seem right for me.

That means first cutting the field down to the asset class I am interested in, then looking for funds that meet my basic needs, from the size of minimum initial investments to check-writing features and more.

I don't waste time with funds that I can't afford to buy into, that do not offer automatic-investment plans and telephone-redemption features, or that charge sales loads.

Many terrific load funds are out there, but I don't want to pay a sales fee after making the effort to do my own research.

Learn the story of the fund or its manager.

Investing is a leap of faith. You need something to base that faith on, whether it is the expertise of an investment genius or the simplicity of a style of investing, such as indexing.

Either way, I look for a compelling reason to go with a fund. You can often find that reason in the fund's newsletters; the best managers in the business tell you a lot about their style and discipline by what they send out to shareholders and prospective investors.

This factor has become increasingly important to me. Without a thorough understanding of the fund and the manager, I may not have the confidence to stay put.

Examine performance, particularly over the long term.

This used to be one step higher in my process. With the stock market of the 1990s making almost every fund look pretty good, I find performance numbers less compelling. Still, my initial cut is for funds in the top 25 percent of their peer group over the last five years.

I also look for volatility, taking the fund's worst quarter and forecasting it over a year to tell me what might happen if things get scary. I won't buy a fund where that volatility frightens me.

Last, I look at data from a ratings service such as Morningstar or Value Line, seeking independent verification that I have limited my selections to top performers with superior leadership.

Choose the finalists and call for three to five prospectuses.

I want to make sure a fund's holdings are consistent with the manager's discipline, and check out what the fund is allowed to invest in, which is a key to how the portfolio could change in the future. If the list of holdings makes me nervous, I move on.

Look at expense ratios and turnover.

This is how I weed my short list. A fund is entitled to make money off me, but higher-than-average expenses are a turn-off. Low-turnover funds tend to be tax- and cost-efficient.

I want funds I can trust in all market conditions. In a sour market, funds with the big expense ratios and high turnover are likely to suffer more than the rest.

Write the check.

By now, I've come to a decision. I sweat out my choices but am excited by their potential. If that rush is missing when you sign a fund's paperwork, something is wrong; start the process over again.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston 02107-2378.

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