Mutual Fund Buzz for October 19: How to Pick the Best

Before you invest in another mutual fund, give U.S. News's latest post a read. Adam Bold, founder of the Mutual Fund Store, an investment firm with more than $5 billion in assets, lays out five things to consider when you're buying a fund. It's important to research the manager's record and tenure at the fund, Bold says, along with how much of the manager's own money is invested in the fund. Size also matters, he says, because ballooning assets can limit a manager's flexibility. Investors shouldn't just look at a fund's trailing returns over five- and 10-year periods. Bold says you should also consider how funds perform over different calendar years, including bear and bull markets. He suggests sticking with no-load funds, which don't levy a sales charge.

[See top-rated funds by category ranked by U.S. News Score.]

In an interesting opinion piece, Bloomberg columnist David Pauly says it won't be long until hedge fund returns look similar to typical mutual fund returns. He writes: "Hedge funds are destined to become like mutual funds: They will have trouble beating the markets." With more than 6,900 hedge funds on the market today, Pauly believes there is less room for one fund to gain an advantage over the rest. Pauly believes hedge funds are currently experiencing what mutual funds already have. He writes: "There are more than 7,600 mutual funds in the U.S., according to Investment Company Institute, a Washington-based trade group, and many investors have given up hope that they can consistently beat the crowd. They have switched to index funds, which track a set list of investments." Pauly cites a recent ICI figure: Of the households that invested in mutual funds in 2009, 27 percent owned at least one index fund. He believes that in the future, fewer hedge funds will be able to post extremely high returns, which will force many of them to close shop. Pauly says lower market returns going forward may make investors reconsider where they put their money. He writes: "The years ahead may be tough for all investors. You can bet that the shrewdest of them are thinking of anything other than hedge funds."

Bloomberg: Hedge Funds Succumbing to Mutual Funds' Mediocrity: David Pauly

[See U.S. News's Why Investors Are Flocking to Index Funds.]

In a recent article, the Wall Street Journal examines the stock market's rather large run-up in the face of headwinds like high unemployment and the potential for more intervention from the Federal Reserve through quantitative easing (in which the Fed would buy up more long-term treasuries to help jump-start lending and the economy). Stocks and bonds have both performed relatively well. Various small-cap indexes have gained more than 10 percent year-to-date and the U.S. Barclays Capital Aggregate Bond Index is up about 8 percent over the same time period. The Journal editor says investors should consider allocating some of their portfolio to low-risk cash investments like deposits, trimming their bond portfolio, and making sure their exposure to commodities isn't higher than 10 percent.

WSJ: It's Time to Take Some Profits

[For more investing insights, see U.S. News's new blog, The Smarter Investor.]