Here’s how to tell if your mutual fund’s a clunker

The Senate extended the so-called cash-for-clunkers program last week, making more money available for people who want to upgrade their car from old and inefficient to improved and different.

There’s no similar relief program for mutual fund investors, but there’s also no need for one. You can turn in your clunker of a fund for cash any time, provided you recognize your fund for what it is.

Alas, the criteria for a clunker of a fund aren’t set in stone, like the rules the government uses to determine what qualifies for a trade-in. That’s why an investor should see if their funds have any of the earmarks of a clunker; if your fund behaves like a gas guzzler and drives like an old beater, turn it in for something better.

Your mutual fund might be a clunker if:

It can’t keep up with the traffic.

You don’t need the fastest car on the road, but your investment vehicle needs some pick-up. If your funds can’t keep pace with their benchmarks - a minimal standard for doing the job you picked them for - you’re falling behind, and it will take you longer to reach your financial destination.

One measure of whether your fund can keep up: See if the fund lost more than its benchmark during the market’s down slope (early October 2007 through early March of this year), and has lagged its index on the way back up (performance since March 9). If it has, you’ve got one of the worst investment vehicles on the road.

It guzzles your gas.

Cash-for-clunkers is all about turning in cars with low fuel efficiency for newer models that are more fuel-friendly. In mutual funds, your money is the fuel and the expense ratio is your miles per gallon.

In this case, lower is better. The average expense ratio for a stock fund is roughly 1.4 percent; it’s 1.0 percent for a bond fund. If there is nothing to justify the bigger pricetag - what is the fund doing that you are willing to pay extra to get? - look for something that is more efficient with your financial fuel.

It needs constant engine repairs.

The manager is your fund’s power plant. If the manager keeps changing engines, you could wake up one morning to find that the big V-8 you bought has been replaced by two hamsters running on a wheel trying to make things go. Manager change is always a worry, but excessive turnover is a problem; good funds don’t go through three managers in a decade.

It looks like a sports car but drives like a lawnmower.

There are a lot of complex, newfangled and fancy funds these days, from absolute return issues to 130/30 funds, long-short and market-neutral products, leveraged and inverse-leveraged deals and more. These are all built to maximize performance or to deliver returns in specific market conditions, but few live up to the hype. If the Porsche fund you were sold drives like a Yugo, get a new ride.

It is made by the fund world’s equivalent of the Big Three.

Huge brokerage firms, foreign insurance companies and multi-national banking giants see mutual funds more as a sideline business - something to flesh out the product line - rather than a primary focus.

http://www.bostonherald.com/business/general/view.bg?articleid=1189983&srvc=business&position=3
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