REASONS FOR DITCHING A MUTUAL FUND

Mutual funds are designed differently. They have various features or traits, as well as pros and cons. Not all instruments are created equally. Hence, not all funds are worth your capital, effort, and time.

Below are telltale signs to scrap the fund from your portfolio.

Expectations

Does the fund meet your goals or projections? Can it withstand any adversity? While market volatility is inevitable, a fund that sustains losses that is larger than expected poses a problem. Also, figure out if the fund is a target-date fund, a derivative which automatically resets all the assets in the portfolio based on indicated time frame suitable for a certain holder.

Expense Ratio

Let’s make a clarification at this point: expense ratio and loads are two different items. Expressed as a percentage, the ratio assimilates the money allocated by an investment company to oversee a mutual fund. The lower the better. But how low should the ratio be? Unless the returns are impressive, any ratio greater than 1% is unacceptable.

Load

Load is charged when purchasing or claiming shares in the fund. There are three kinds of loads. Back-end loads begin levying sales charge at a specific percentage then slides in the long run. Front-end loads pays the salesperson upon buying the fund. No-load funds do not levy a commission or fee when purchasing the fund. Among the three, a fund with no load is the best choice.

Performance

How did the mutual fund fare previously? It is imperative to pay attention to the returns it has produced and its performance relative to a benchmark index being monitored. If the figures cannot speak volumes, examine the fundamental fees.

Tenure

It pertains to how long the manager has been in his position. Especially important for active funds, a good manager, responsible for making important day-to-day decisions, should be holding his job for at least two years.

You may opt to check the rating by Morningstar, which is in the business of providing analysis, commentary, and ratings, among others. If a particular fund has less than four stars, it is about time to ditch the mutual fund in exchange for a better one.