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Financial Planning for Scientists, Part 12: More on Mutual Funds

Last time, we took a theoretical look at mutual funds. We learned what a mutual fund is, we looked at the different kinds of funds available in the marketplace, and we learned a little about how to pick a mutual fund investment.

This month, we'll follow up that discussion with two key lessons. The first is how to read a mutual fund listing; the second is where to get more information about mutual funds.

Among the more intimidating things about investing, especially in mutual funds, are the charts and tables you see every day in the newspaper. Most papers have these--usually written in 6-point font, barely legible, and full of information. A lot of people think, "I should know what these are telling me before I invest." They see the list of thousands of funds and think, "how could I possibly pick one of these, and anyway, how am I going to know what's going on with it if I can't read these charts?" This month, we'll show you how.

These obscure, almost cabalistic mutual fund listings have a simple function in life: They are a way of assessing the performance of mutual funds over time. They can be very useful in both tracking your investments as well as helping you pick the right fund. Mutual fund listings come in five different forms, and it is important to determine which listing you are reading before making any assessments, because making an assessment based on the wrong listing can be a significant error.

The five forms of fund listings are the daily listings, weekly listings, monthly performance tables, and the quarterly and year-end reports. As you'd expect, each listing shows the mutual fund's performance over its respective length of time: A daily listing will compare the mutual fund's performance to its performance on the preceding day. Each listing also shows different information, with increasing complexity as the time covered increases.

Daily listings

The daily listing is the simplest listing to read, but is probably the least useful to the average investor. This listing allows investors to constantly monitor the performance of their funds. This may be good for the obsessive, but information about daily fluctuations in fund value is almost useless to the long-term investor.

Daily funds are listed in four-column table form. The first column is the name of the fund. Daily listings are often organized by the company managing the fund (e.g., Royal Bank Funds) rather than by the fund name itself, so you have to know both the name of the fund and the name of the company managing the fund if you want to use these listings. The second column is a "specifics" column. In it, you'll find a brief description of the type of fund, usually defined by some kind of letter code. This code will be different depending on the newspaper you are looking at, but typical codes are F for front-end load fund, N for no-load fund, and U for a U.S.-dollar-denominated fund. If you already know what kind of fund you are investing in, this "specifics" column won't tell you anything new. If you don't know what the terms mean at all, check out the previous article in this series.

The last two columns are entitled NAVPS and either "$Chg" or "%Chg." NAVPS stands for the net asset value per share--which is equivalent to the current market value of the investments made by the fund, per share issued. The $Chg or %Chg column gives you an indication of the change in NAVPS, compared to yesterday's for that same fund, expressed in dollars or in percentage form, respectively.

In short, daily listings will tell you how much each share of the fund is worth, and how that compares to what it was worth yesterday.

Weekly Listings

Weekly fund listings are a little more complex. Like the daily fund listings, this listing shows the fund name, any specifics of the fund, and "Fri $Chg" and "Fri %Chg" columns, showing Friday's change in NAVPS, compared to Thursday's for the same fund. But weekly columns contain additional data. The "52W high" and "52W low" columns show the highest and lowest NAVPS reached in the last year. This allows investors to determine at a glance both the historical volatility of the fund (by looking at the range between high and low) and where the fund's value stands today as compared to the last year. Finally, the listings have a summary of the weekly NAVPS--the highest and lowest NAVPS reached in the last week, the NAVPS reached at the end of Friday, and how that NAVPS compares to the NAVPS of the mutual fund the week previous.

By looking at the "high and low" for the week, the closing value, and the change in value (compared to last week), the weekly fund listings offer a nice summary of what has happened to the fund over the last week.

Monthly Performance Tables

Monthly performance tables show even more data. Along with the fund name and "specifics," this table typically has columns indicating the fund's net assets (which gives you an idea of how large the fund is), the rate of return on the fund for the month, the last 6 months, and the last year; and the average annual return for longer periods of time (e.g., the last 3, 5, and 10 years). A good performance table will also give you the standard deviation for the last 3 years, which, in turn, will tell you the variability in the fund's rate of return (a good measure of the fund's longer-term volatility). This table will also typically give you the fund's expense ratio--which tells you how much of your money is going to the fund managers.

Monthly performance tables are a useful way of narrowing your mutual fund choices. If you're looking for a fund that's low risk but offers a steady rate of return, look for stable long-term return percentages and low standard deviations.

Quarterly Reports

Once you've narrowed your options down to a few funds that meet your needs, get copies of their quarterly reports, which are available from the fund management companies. These reports vary widely in both style and content, but will give you a much better idea of the performance and content of the fund.

Of course, funds also have annual reports that they'll send to you every year when you've bought into the fund. Both quarterly and annual reports are quite complex, and beyond the scope of this basic introductory look at mutual funds. If you want to understand these reports, or you want more information on mutual funds (which is a must before investing--remember, this is just an introductory course), we've found a couple of other sites that might help:

Metlife's guide to picking the right mutual fund. A quick and easy guide that offers, in some areas, a little more detail than this series. But by and large, it is easy to read and a nice introduction to mutual funds.

The Motley Fool's realistic (yet cynical) view on how to pick a fund.

Brill. Click on "Funds 101" to get to Brill's educational section. Here you can get information on some pretty specific topics. The section is quite a bit more advanced than our discussion here, but parts of it can be quite useful: Check out their glossary of terms if, in the course of your research, you hit a term or acronym you don't understand. Clicking on "fundlink" will send you to an alphabetical list of links to just about every mutual fund company out there.

iVillage's mutual fund picker helps you find mutual funds that match your investment criteria. Using this will also help you figure out what some of these criteria should be!

Have fun exploring the data-rich world of mutual funds, but don't forget to come back in a few weeks, when we'll take a look at what you can expect (or not expect) from your university pension plan.