How to Choose the Best Mutual Funds

NEW YORK (MainStreet)—Choosing the best mutual funds to help maximize your portfolio returns can be a daunting task.

To ensure that your fund beats the stock market's returns, financial advisors recommend that investors research the following seven issues to obtain the best returns: examining the expense ratio, sales load, turnover ratio, underlying securities, share classes, portfolio manager and prospectus can give you a better chance to maximize your investment and lower your risks.

The expense ratio is a key factor in choosing your mutual fund. This is the fee charged by investment companies to pay portfolio managers for their research and analysis.

Investors should look for expense ratios to be in the 1.2% to 1.4% range, said John McDonough, president and CEO of the Studemont Group, based in The Woodlands, Tex. For an indexed or passive fund, the ratio should range between 0.2% to 0.5%, and investors should look for one that is 0.3% to 0.4%. If you choose an extremely actively managed fund, the expense ratio is likely to be closer to 2%.

"Investors look at the performance of the mutual fund for the past one to ten years and year to date," he said. "They are chasing returns. The lack of investor knowledge can be a drag on performance."

However, when investors focus only on the expense ratio, they could miss 1% to 3% on returns, said Scott Sonnier, president and chief investment officer of Financial Management Services of America, which is based in Lafayette, La.

"This is an important factor when you are researching comparable funds or asset classes and if the returns are equal," he said. "This will give an investor a better performance over the life of the fund."

Sales loads are commissions charged by financial advisors and stock brokers for their recommendation. The fee is paid by the mutual fund company but passed onto the investor. The three main types are front loads, back loads and level load and are commonly referred to as "class A, B and C" shares.