Morningstar Guide to Mutual Funds- Five-Star Strategies for Success

I. how to pick mutual funds:

1) know the fund portfolio

• equity: value/blend/growth vs large-cap/mid-cap/small-cap
• bond: long/intermediate/short duration vs high/medium/low credit quality

2) performance

• performance against index or peer group
• performance over long period (5 to 10 years)
• performance consistency year over year
• make sure the fund manager responsible for the performance still there to manager the fund

3)risk

• performance volatility
• concentration of stock/bond holdings

4)understand the fund manager

• rule of thumb: >10 years of experience
• strong support team for research & trading
• fund house with wide range of successful funds , quality board, maintain fund cost & no trendy fund launches.

5)cost

• lower turnover, lower trading costs
• bond less than 0.75% ; equity less than 1%
• check expense ratio

II. Core & non-Core Stock & Bond Funds
Core Stock funds

• value funds (relative value (compare with index), absolute value* (look for best deal), income oriented value(dividend focus))
• growth funds (earnings-driven, revenue-driven)
• blend funds (growth at reasonable price)
• flexible funds
• indexing (ETF or index funds)

non-Core Stock funds

• foreign funds (consistently hedge foreign exchange risk or no hedging at all, fair value pricing to minimize the impact of short term traders)
• small-cap funds (diversify)
• no sector funds except real-estate & commodities (use dollar-cost averaging strategy for sector funds)

Core Bond funds

• focus on intermediate-term funds investing in government & corporate bonds
• look for low-expense funds
• focus on total return (income + capital gain)

non-Core Bond funds

• stay away from junkiest bonds
• ultra-short term bond funds as alternative for money-market funds
• inflation-indexed bond funds can be useful
• keep small portion of world bonds funds & emerging market bonds funds only, due to their volatility

III. Portfolio Building

• asset allocation plan to meet financial goals (input: amount of money, time, rate of return, savings rate; output: stock/bond mix)
• avoid market-timing
• core funds accounts for 70-80% of portfolio
• caution with stock funds to meet short-term goals (within 5 years)
• consolidate the funds into single fund house or distributor.
• re balance regularly for asset class, country & style exposure.

IV. When to sell

• portfolio rebalancing
• changes of fund fundamentals (e.g. fund style)
• mis-understand the fund fundamentals
• changed investment goals
• too volatile funds