Analyzing fund returns can be one of the more treacherous tasks for the average investor. There is so much information on the internet, but it doesn’t necessarily make the regular Joe more knowledgeable when it comes to picking a fund. In addition, the prospectuses have such technical legal and financial jargon that you practically need an engineering degree to get through it cover to cover. In my mind, the most important thing you do not want to overlook is making sure you are comparing funds net vs. net when making a decision about where to put your money.
The first piece of the ‘nothing but net’ conversation is to line up all the costs of the fund. Beware that some costs will take you more time and research to find out versus others. Review shareholders fees such as sales loads, exchange fees, and purchase fees. Closely examine fund operating expenses including management fees, 12b-1 fees, and a line item called operating expenses. Last, inquire about the cost of trading and turnover within the fund. The key is that you can then stack up the funds side by side ‘net’ of all costs.
The second piece of the analysis for non-qualified accounts will be the cost of tax. Depending on your overall tax bracket and how tax efficient the fund is between dividends, interest, and capital gains, you will need to overlay the cost of tax on top of the actual expense cost of the fund.
Between these two crucial pieces of data, you can become much smarter as an average investor to see whether one particular fund is better than another depending on the asset class and time frame you choose to measure them against each other.
The information provided is not specific investment advice, a guarantee of performance, or a recommendation. This is for illustrative purposes only. This material is not intended to provide legal, tax or investment advice. Clients should contact their own tax and financial advisors to learn more about the rules that may affect individual situations.